Michelle Industries issued a Swiss franc–denominated 5-year discount note for SFr200 million. The proceeds were converted to U.S. dollars to purchase capital equipment in the United States. The company wants to hedge this currency exposure and is considering the following alternatives:∙ At-the-money Swiss franc call options.∙ Swiss franc forwards.∙ Swiss franc futures.a. Contrast the essential characteristics of each of these three derivative instruments.b. Evaluate the suitability of each in relation to Michelle’s hedging objective, including both advantages and disadvantages.
Michelle Industries issued a Swiss franc–denominated 5-year discount note for SFr200 million. The proceeds were converted to U.S. dollars to purchase capital equipment in the United States. The company wants to hedge this currency exposure and is considering the following alternatives:∙ At-the-money Swiss franc call options.∙ Swiss franc forwards.∙ Swiss franc futures.a. Contrast the essential characteristics of each of these three derivative instruments.b. Evaluate the suitability of each in relation to Michelle’s hedging objective, including both advantages and disadvantages.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Michelle Industries issued a Swiss franc–denominated 5-year discount note for SFr200 million. The proceeds were converted to U.S. dollars to purchase capital equipment in the United States. The company wants to hedge this currency exposure and is considering the following alternatives:
∙ At-the-money Swiss franc call options.
∙ Swiss franc forwards.
∙ Swiss franc futures.
a. Contrast the essential characteristics of each of these three derivative instruments.
b. Evaluate the suitability of each in relation to Michelle’s hedging objective, including both advantages and disadvantages.
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