Question
An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. The following data is available: Rates and prices in US-cents/CHF.
An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. The
following data is available:
Rates and prices in US-cents/CHF.
Spot rate: 71.42 cents/CHF
90-day forward rate: 71.14 cents/CHF
US -dollar 90-day interest rate: 3.75% per year
Swiss franc 90-day interest rate: 5.33% per year
Option Data in cents/CHF
_______________________________
Strike Call Put
70 2.55 1.42
72 1.55 2.40
_______________________________
a) Assess the USD cost to the importer in 90 days if it uses a call option to hedge its
CHF750,000 account payable. Use the call with a strike price of 72 cents/CHF
b) What will be the cost of the payable in 90 days if a forward contract is used?
c) By how much must the CHF weaken relative to the USD, from 71.42 cents/CHF before the
call option provides a lower cost than the forward hedge?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started