The risk-free one-year interest rate in the Swiss Franc (CHF) is 1.5%, while the risk-free one-year interest rate in the Euro (EUR) is 3.5%. The current spot exchange rate is CHF 1.2000 = 1 EUR and both currencies are traded in an open market without transaction costs. Anyone can borrow or lend at the risk-free rate in either currency.

Your Swiss client (whose wealth and profits are in Swiss Francs) has an obligation of EUR 10,000, six months from now. How can your client construct a money-market hedge, to fund this obligation without exchange-rate risk?

1)What currency exchange (if any) needs to be made at the end?

A.Swiss Francs for Euro (i.e. sell CHF and buy EUR).

B.Euro for Swiss Francs (i.e. sell EUR and buy CHF).

C.No currency exchange needs to be made at the end.

2)What is the effective exchange rate in this transaction? Enter this as the number of Swiss Francs that a Euro will cost the client effectively; round to four decimal places. If you believe that the effective exchange rate is uncertain (because future exchange rates are unpredictable) enter the number -1000.