This is Stark's first large purchase from an international supplier. Stark has contracted (in December 2017) to purchase a large shipment of cowbells for SF 1,100,000.In accordance with the contract, Stark has transferred SF 100,000 to the Swiss firm as a deposit on the contract on January 18, 2018.The Swiss firm has agreed to deliver the cowbells on February 20, 2018 and payment of SF 1,000,000, the balance due, is to be made May 16, 2018.

On 12/14/2017, the day that Stark placed the order for cowbells from the Swiss company, the exchange rate for the Swiss Franc is $1.010094. However, the Swiss Franc has appreciated 7.22% since then. Marks is concerned that the Swiss Franc could continue to appreciate even more in the coming weeks, and it is this concern that has prompted discussion with First Mississippi Bank. Marks wants to learn what techniques are available to Stark to reduce the foreign exchange risk associated with the Swiss Franc payable.

.1.What is the dollar cost of the deposit payment made on January 18, 2018?Note that this payment is made prior to February. This cost remains unchanged regardless of the Stark's hedging choice.2.There are four parts to this question. Note that the futures price on May 16, 2018 for a June 18, 2018 maturity Swiss Franc futures contract and the spot price on May 16, 2018 for the Swiss Franc are both unknown on February 15, 2018. a. Suppose the futures price on May 16 for a June 18 contract is $1.02 and the spot price on May 16 is $1.025. What is Stark's total dollar cost if Stark hedges with a futures contract and the futures price on February 15 for a June 18 contract is $1.09? When you calculate "total dollar cost" include the dollar cost of the deposit payment (calculated in question 1), the profit/loss on the futures contract, and the payment to purchase Swiss Francs in the spot market on May 16. If there is a profit/loss on the futures contact, multiply the profit/loss by -1 when calculating cost since a positive profit would represent a negative cost. As described in the Case, the long futures contract that Stark enters into on February 15 is offset with a short futures contract on May 16. Given marking to market, Stark realizes all profits/losses associated with the long futures contract by May 16 when the contract is offset. Once the contract is offset there are no future profits or losses. b.Suppose the futures price on May 16 for a June 18 contract is $1.15 and the spot price on May 16 is $1.148. What is Stark's total dollar cost if Stark hedges with a futures contract and the futures price on February 15 for a June 18 contract is $1.09?When you calculate "total dollar cost" include the dollar cost of the deposit payment (calculated in question 1), the profit/loss on the futures contract, and the payment to purchase Swiss Francs in the spot market on May 16. If there is a profit/loss on the futures contact, multiply the profit/loss by -1 when calculating cost since a positive profit would represent a negative cost. As described in the Case, the long futures contract that Stark enters into on February 15 is offset with a short futures contract on May 16. Given marking to market, Stark realizes all profits/losses associated with the long futures contract by May 16 when the contract is offset. Once the contract is offset there are no future profits or losses. c.Briefly explain why your answers to parts A and B are similar but not identical? d.Recall that Stark had originally assumed a constant exchange rate for the Swiss Franc and therefore, forecasted on December 14, 2017 a profit on the cowbells of approximately $188,900. If Stark breaks-even at a cost of $1,300,000, what is Stark's profit on the cowbells hedging with a futures contract?Compare profit to the profit Stark had originally forecasted.Since Stark breaks-even at a cost of $1,300,000, subtract "total dollar cost" from $1,300,000 to calculate profit on the cowbells.Note that you should provide two answers: one answer corresponds to the assumptions in part A above and the second answer corresponds to part B above.3.If Stark uses the forward contract to hedge, what is Stark's total dollar cost of the cowbell contract? What is Stark's profit on the cowbell purchase?Include in total cost, the cost of the January deposit and the May payment. 4. If Stark uses the spot transaction (also known as a money market hedge) suggested in the case, how many Swiss Francs does Stark purchase in the spot market on February 15, 2018 and how many dollars does Stark borrow from the bank on February 15, 2018 to pay for the Swiss Francs that Stark purchases?Note that the spot rate on May 16 is unknown at the time Stark makes its hedging decision on Feb 15, 2018. Stark's objective is to not have to trade in the spot market on May 16, 2018. There is no foreign exchange risk if it is unnecessary for Stark to buy or sell Swiss Francs on May 16 at the spot rate. 5.If Stark uses the spot transaction suggested in the case, what is Stark's total dollar cost of the cowbell contract? What is Stark's profit on the cowbell purchase?Include in total cost, the cost of the January deposit and the May payment.You will need to calculate Stark's dollar cash outflow on May 16 (the loan repayment). This is Stark's dollar cost of the May 16 payment of SF 1,000,000. 7.Examine the spot exchange rate data in exhibit 1.Observe that the Swiss Franc appreciated 7.22% from December 14, 2017 to February 15, 2018. If the Swiss Franc follows this same rate of appreciation, this suggests appreciation of approximately 3.55%/month or 11.03% for 90 days. Define 11.03% appreciation as constant appreciation.For each of the 3 rates of appreciation (constant, high, low), what is the corresponding future spot rate in 90 days (on May 16, 2018)?For each of the 3 forecasted future spot rates, what is Stark's total dollar cost assuming Stark is unhedged and the actual future spot rate is equal to the forecasted future spot rate? What is Stark's profit from the cowbells?You will calculate 3 forecasted future spot rates for May 16, 3 total dollar costs, and 3 profits. Each answer depends on whether constant, high, or low appreciation.