a) What is your cost of buying SF5,000 with SF call option used for hedging? b) Compared with (a), what is the dollar (USD) cost of SF payable if you hedge using a forward contract. c) Determine the future spot exchange rate that will equate the total cost of using forward and option market hedges. d) If the SF appreciates beyond the exercise price of call option, what is your total dollar cost of SF payable? e) Draft a graph of Cost (y-axis) against $/SF (x-axis) on option hedge and forward hedge
You are the U.S residents who are going to pay SF 5,000 for your family flight tickets to Switzerland in 3 months later. The 3-month forward rate is $0.63/SF. Today, the spot rate of USD to Swiss Franc (SF) is 0.60. You plan to hedge the exchange rate by entering into a 3- month call option on SF. The exercise rate of the option is $0.64/SF for the premium of $0.05 per SF. The addition information you have collected is 3-month USD interest rate 6 percent per annum and SF interest rate 4 percent per annum. You expect the future spot exchange rate would be the forward rate.
a) What is your cost of buying SF5,000 with SF call option used for hedging?
b) Compared with (a), what is the dollar (USD) cost of SF payable if you hedge using a forward contract.
c) Determine the future spot exchange rate that will equate the total cost of using forward and option market hedges.
d) If the SF appreciates beyond the exercise price of call option, what is your total dollar cost of SF payable?
e) Draft a graph of Cost (y-axis) against $/SF (x-axis) on option hedge and forward hedge.
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