Instructions: Show all calculations in detail. No partial credit will be given for just answers. Please answer all 3 parts, a, b &c

3. An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. The following data is available:

Rates and prices in US-cents/CHF.

Spot rate: 71.42 cents/CHF

90-day forward rate: 71.14 cents/CHF

US dollar 90-day interest rate: 3.75% per year

Swiss franc 90-day interest rate: 5.33% per year

Option Data in cents/CHF

_______________________________

Strike Call Put

70 2.55 1.42

72 1.55 2.40

_______________________________

a) Assess the USD cost to the importer in 90 days if it uses a call option to hedge its CHF750,000 account payable. Use the call with a strike price of 72 cents/CHF and include the option call premium in the cost.

b)What will be the cost of the payable in 90 days if a forward contract is used?

c) By how much must the CHF weaken relative to the USD, from 71.42 cents/CHF before the call option provides a lower cost than the forward hedge?