Managing Transaction Exposures

Assume the following information:

• Spot rate: CHF/USD = 0.7142
• 90-day forward rate: CHF/USD = 0.7114
• USD 90-day interest rate: 3.75% (APR)
• CHF 90-day interest rate: 5.33% (APR)

The option data for July contracts is given the table below.

Strike price (CHF/USD)

Call Premium

Put Premium

0.70

2.55 per CHF

1.42 per CHF

0.72

1.55 per CHF

2.4 per CHF

1. U.S. Company ABC, which exports to Switzerland, expects to receive CHF 450,000 in 90 days. Should Company ABC use currency derivatives to hedge transaction risk? If yes, which derivatives should Company ABC use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).
2. U.S. Company XYZ, which imports Swiss watches, needs to pay CHF 750,000 in 90 days. Should Company XYZ use currency derivatives to hedge transaction risk? If yes, which derivatives should Company XYZ use? Please use a contingency graph to support your choices and computation. If no, please explain why (20 points).

Note that the time to pay option premium and time to exchange currencies are different. Please account for the opportunity costs/profit (time value of option premium).