Greedco, a California company, buys vaccines from Switzerland and re-sells them in all states in the USA. It has an exclusive distributorship from this Swiss vaccine manufacturer.

There is a new vaccine coming from Switzerland and Greedco will buy $20 million Swiss Francs worth. The payment terms are payment in full 90 days after arrival. The vaccines have been shipped and arrive on Monday June 1, 2020. Payment will be due on September 1, 2020. Under the exclusive distributorship agreement, Greedco must pay in Swiss Francs. They have absolutely none, and all their sales are, of course, in U.S. dollars. He will have to convert dollars to Swiss Francs on September 1.

The President of Greedco has been involved in currencies for years. He has studied them and, based upon his research, and the current global issues, he is certain that the Swiss Franc will be devalued sometime in the next 3 months, before Greedco must pay. He wants to take advantage of this certainty and make more money for the corporation. However, he has shareholders to whom he is responsible to and he must act responsibly and prudently. He has always hedged his position with futures contracts.

He knows that if he hedges with contracts he will make no money if the devaluation occurs. In fact, it will be a sum zero game with a cost of only $4,000. Also, if he is right, he will have to come up with margin requirement of perhaps $400,000. They have the cash, it will not affect cashflow, so that is not a problem.

So he decides to go with Options.

Questions to consider before reading ahead:

Note: the Swiss Franc is a parity today meaning 1 SWF= 1USD

1. What is his position? Why? _________________________________________________________

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2. What position should he take, meaning calls or puts? Why? ____________________ ________________________________________________________________________

3. How many puts or calls should he buy? ___________________________________________________

4. What will it cost him (we used 6% per annum cost)? _________________________

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