You are the managing Director of Sunkwa limited a food processing company based in Atlanta in the United States of 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; (i) Calculate your expected dollar cost of buying SF5, 000 if you choose to hedge via call option on SF. (ii) calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract. (iii) at what future spot exchange rate will you be indifferent between the forward and option market hedges?
You are the managing Director of Sunkwa limited a food processing company based in Atlanta in the United States of 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;
(i) Calculate your expected dollar cost of buying SF5, 000 if you choose to hedge via call option on SF.
(ii) calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.
(iii) at what future spot exchange rate will you be indifferent between the forward and option market hedges?
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