Question
Suppose that you (i.e., company XYZ) are a US-based exporter of goods to Switzerland. You will be receiving payment on a shipment of imported goods
Suppose that you (i.e., company XYZ) are a US-based exporter of goods to Switzerland. You will be receiving payment on a shipment of imported goods (CHF100,000) in three months and want to hedge your currency exposure. The US risk-free rate is 6% and the Switzerland risk-free rate is 4% per year. The current spot rate is $1.1/CHF, and the three-month forward rate is $1.2/CHF. You can also buy a three-month option on CHF at the strike price of $1.25 /CHF for a premium of $0.05/CHF.
1.If XYZ enters a forward contract today, the guaranteed dollar proceeds for this CHF obligation in three months should be $?
2.If XYZ wants to hedge the transaction exposure using money market hedge, XYZ should ______________. A) borrow PV of CHF and buy USD today, and deposit USD in the bank and sit on it. B) buy PV of CHF today using USD, and deposit CHF in the bank and sit on it.
3.If XYZ uses MMH, the guaranteed dollar proceeds in three months should be $?
4.By comparing forward hedge and money market hedge, which strategy (forward/MMH) would you prefer to use?
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