Suppose it is Thursday, September 16, and Origine, an importer of Swiss watches to Untied States, has an account payable of CH'F 50,000 due on Wednesday, December 15. The following data are available . .

Spot rate: $07142/CHF.

90-day forward rate $0.7144/CHF

U.S. dollar 90-day interest rate: 3.75% p.a. / Swiss Franc (CHF),

90-day interest rate: 5.33% p.a.

Options data for.December contract, $/CHF

Strike Premium Call Premium Put Premium

0.720 0.0155 0.240

Required:

i) Determine the total cost in dollars of hedging the payable using a forward contract. ( 4 marks)

ii) Determine the maximum cost of hedging with an option contract. (6 marks)

iii) On axes representing future exchange rates (x-axis) and total costs (y-axis). Show the graphs representing following strategies adopted by Origine

a). A do-nothing strategy _ (1 mark) _

b) Forward contract hedge strategy. (2 marks)

c) An option contract hedge strategy. .