IBM, a company in America, has sold computer chips to a Swiss company and given the Swiss customer the option to repay in three months by paying either $ 10000 or SF15000. Today, the current exchange rate is $ 0.60 / SF (A) Given this free choice to the customer, what exchange rate implies? (B) If the current exchange rate turns out to be $ 0.62 / SF, which currency do you think the customer will choose to use to pay for the camera? What is the monetary benefit of this option for the customer?

What is the risk for IBM by giving the customer this free choice and what is the best hedging strategy to address the potential risk? Based on the following data, show the monetary results of your proposed strategy.

Given

price

Forward rate, 90 days ($/SF)

0.6475

Call option OTC, 90 days ($/SF)

Strike=0.638, Premium= $0.03 per SF

Put option OTC, 90 days ($/SF)

Strike= 0.640, Premium= $0.05 per SF

Cost of capital

9.500% p.a.

Switzerland borrowing rate

3.000% p.a.

Switzerland investing rate

US borrowing rate	5.000% p.a.
US investing rate	3.500% p.a.

2.500% p.a.