You are the CEO of VEGES INC. a food processing company based in America. You are planning to visit Geneva, Switzerland in three months’ time to attend an international business conference. You expect to incur the total cost of SF 5,000 for lodging, meals, and transportation during your stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-month call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland. REQUIRED; [Show all conceivable steps employed in arriving at your solution] (i) Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.
Question
You are the CEO of VEGES INC. a food processing company based in America. You are planning to visit Geneva, Switzerland in three months’ time to attend an international business conference. You expect to incur the total cost of SF 5,000 for lodging, meals, and transportation during your stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-month call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland.
REQUIRED; [Show all conceivable steps employed in arriving at your solution]
(i) Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.
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