Question

1. Hopkins Co. transported goods to Switzerland and will receive 3.5 million Swiss francs in six months. It believes the six-month forward rate will be an accurate forecast of the future spot rate. The six-month forward rate of the Swiss franc is $.71. A put option is available with an exercise price of .72 and a premium of $.02.
   1. Would Hopkins prefer a put option hedge or no hedge?

2. Explain.

Answer 1

Solution: as alternative 1 : hut oftion Hedge Exercise frice for heat option les) - Premium Payale tos furoption Net Price Arrout in Suves fame Dollat) a $0.72 = ($ 0.02) $0.70 Around receivable after 6months = 3.5 million Swiss Francs Herer, Arrount receivable after exercising pent ophon = $3.5million x 0.70 = Swiss frore Dollat 2.45 million Alternative! No Hedring b 6 month forward rate of suits franc = $.71 Hence, thround te ceivadle after Grrorth = $3.5 million x 0.71 Suiss franc $ 2.485 million Therefore, No Hedging is preferable. Hofkins co. shall prefer No Hedging, fince, the amount receivable under funt Offion Medging is only $2.45 milion ulhereas without hedginquit is $2.485 million. Therefore, it is advisable to Hopkins co., not to Hedge with custerty exposure