If Stark uses the forward contract to hedge, what is Starks total dollar cost of the cowbell contract? What is Starks profit on the cowbell purchase?

Include in total cost, the cost of the January deposit and the May payment.

(10 points)

4. If Stark uses the spot transaction (also known as a money market hedge) suggested in the case, how many Swiss Francs does Stark purchase in the spot market on February 15, 2018 and how many dollars does Stark borrow from the bank on February 15, 2018 to pay for the Swiss Francs that Stark purchases?

Note that the spot rate on May 16 is unknown at the time Stark makes its hedging decision on Feb 15, 2018. Starks objective is to not have to trade in the spot market on May 16, 2018. There is no foreign exchange risk if it is unnecessary for Stark to buy or sell Swiss Francs on May 16 at the spot rate.

(10 points)

5. If Stark uses the spot transaction suggested in the case, what is Starks total dollar cost of the cowbell contract? What is Starks profit on the cowbell purchase?

Include in total cost, the cost of the January deposit and the May payment.

You will need to calculate Starks dollar cash outflow on May 16 (the loan repayment). This is Starks dollar cost of the May 16 payment of SF 1,000,000.

(10 points)

6. Marks has already ruled out hedging with the futures contract, because of the complexity of the hedge. A major concern for Marks is that Hunter Paul would not understand the cash flow with marking to market with a futures contract. Of the remaining two methods of hedging, forward hedge or spot transaction, which of the two would you recommend to Marks?

You should consider both risk and the total dollar cost of each hedge.

(15 points)

7. Examine the spot exchange rate data in exhibit 1. Observe that the Swiss Franc appreciated 7.22% from December 14, 2017 to February 15, 2018. If the Swiss Franc follows this same rate of appreciation, this suggests appreciation of approximately 3.55%/month or 11.03% for 90 days. Define 11.03% appreciation as constant appreciation.

Observe that the greatest appreciation over a 4 week period from August 2017 to February 15, 2018 is 5.04%. If the Swiss Franc follows this same rate of appreciation, this suggests appreciation of approximately 15.89% for 90 days. Define 15.89% appreciation as high appreciation.

Observe that the greatest depreciation over a 4 week period from August 2017 to February 15, 2018 is 2.98%. If the Swiss Franc follows this same rate of depreciation, this suggests depreciation of approximately 8.68% for 90 days. Define -8.68% appreciation as low appreciation.

For each of the 3 rates of appreciation (constant, high, low), what is the corresponding future spot rate in 90 days (on May 16, 2018)?

For each of the 3 forecasted future spot rates, what is Starks total dollar cost assuming Stark is unhedged and the actual future spot rate is equal to the forecasted future spot rate? What is Starks profit from the cowbells?

You will calculate 3 forecasted future spot rates for May 16, 3 total dollar costs, and 3 profits. Each answer depends on whether constant, high, or low appreciation.

(15 points)

8. Assuming your answer to question 7 is a reasonable description of what could occur if Stark remains unhedged, discuss whether you would recommend to Marks a forward hedge, a spot transaction hedge or remaining unhedged.

You will need to base your recommendation on both risk and total dollar cost, since risk is very different if unhedged compared to hedged.

You will need to read the case carefully and provide an argument for your choice based on statements and issues raised in the case.

(10 points)

9. What should Stark have done on December 14, 2017 when it contracted to purchase cowbells from the Swiss supplier?

(5 points)