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Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss Francs in one year to pay for imported
Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss Francs in one year to pay for imported supplies. The U.S. one-year interest rate is 2 percent, versus 5 percent for Switzerlands one-year interest rate. The spot rate of the Swiss franc is $0.90, and the one-year forward rate of the Swiss franc is $0.88. A one-year call option on Swiss franc exists with an exercise price of $0.90 and a premium of $0.03 per unit. As the treasurer of Grady Co., you think the spot rate of the Swiss franc is the best forecast of the future spot rate of Swiss franc. A. If you use a money market hedge, determine the amount of dollars that will pay for the payables. B. If you use a call option hedge, determine the expected amount of dollars that you will pay for the payables (account for the option premium within your estimate) C. If you use a forward contact, determine the expected amount of dollars you will pay for the payables. D. Suppose Grady Co.s forecast for the spot rate of the Swiss franc at the time of payable are due is as follows: $0.85 (30 percent probability) $0.90 (60 percent probability) $0.94 (30 percent probability) What will be the expected amount of dollars you will pay, if you do not use any hedging strategy? E. Draw a contingency graph for Hedging payables with a call option for above case
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