You are a Swiss investor who has $10 million in short-term dollar deposits. You are worried that

Question:

You are a Swiss investor who has $10 million in short-term dollar deposits. You are worried that the dollar will drop relative to the Swiss franc in the next month. You care only about the Swiss franc value of your assets. Currency options exist that would guarantee that the $10 million would be worth a minimum amount of Swiss francs in one month (in March), if the dollar dropped, but would benefit from a dollar appreciation. The March forward is $0.7389/SFr (or SFr 1.3534/$). The quotes for Swiss franc currency options in Chicago are as follows:

a. What minimum portfolio value in SFr can you guarantee for March, using these options? Make the simplifying assumption that all interest rates are equal to zero and that you can buy exactly the desired number of SFr options. You must use some of the $10 million to get the options.
b. What would be the difference if you used forward contracts?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars... Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...