Consider a U. S. based company that imports goods from Switzerland. The company expects to make a payment for a shipment of goods in 120 days. Since the payment will be in Swiss francs, the U. S. based company wants to hedge against a rise in the value of the Swiss franc over the next 120 days. The U. S. risk free rate is 2% and the Swiss risk free rate is 3%, both on a continuously compounded basis. The spot price of the Swiss franc is USD 1.0112.

Suppose that the U. S. company were to sell a forward contract on 1 million Swiss francs with a forward price of USD 1.00400 and 120 days to the delivery date. 45 days later, the spot price of the Swiss franc is USD 1.00300 and interest rates are unchanged

1. The new arbitrage-free forward price is closest to:

a) USD 1.0019

b) USD 1.0010

c) USD 1.0030

2. The value of the short forward position is closest to:

a) USD 3,100

b) USD 4,100

c) USD 3,100