Problem 7.5 Hoffman Bank, Basel (B) Stefan Boerig of Hoffman Bank now believes that the Swiss franc will appreciate against the British pound in the coming 3-month period. He has 250,000 to invest. The current spot rate is 0.7829/SF, the 3-month forward rate is 0.7640/SF, and he expects the spot rates to reach 0.7995/SF in three months. a. Calculate Stefan's expected profit, assuming a pure spot market speculation strategy. b. Calculate Stefan's expected profit, assuming he buys or sells Swiss francs three months forward. a. Assumptions Initial investment (funds available) urrent spot rate ( wiss franc) Three-month forward rate (/Swiss franc) Expected spot rate in three months (/Swiss franc) Values 250,000.00 0.7829 0.7640 0.7995 b. Values 250,000.00 0.7829 0.7640 0.7995 Strategy for Part a: 1. Use the 250,000 today to buy SF at spot rate 2. Hold the SF indefinitely. 3. At the end of three months, convert SF at expected rate 4. Yielding expected pound revenues of 5. Realize profit (revenues less 250,000 initial invest) Strategy for Part b: 1. Buy SF forward six months (no cash outlay required) 2. Fulfill the six months forward in six months cost in pounds 3. Convert the SF into pounds at expected spot rate 4. Realize profit