Question

Instructions: Show all calculations in detail. No partial credit will be given for just 1) Assume the following information: U.S. deposit rate for 1 year U.S. borrowing rate for 1 year New Zealand deposit rate for 1 year - 8% New Zealand borrowing rate for 1 year 10% New Zealand dollar forward rate for 1 year $.40/NZS New Zealand dollar spot rate - $.39/NPS Also assume that a U.S. exporter denominates its New Zealand exports in NZS and expects to receive NZ$600,000 in 1 year. You are a consultant for this firm. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a money market hedge? 2) The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist: US 7% Switzerland 360-day borrowing rate 360-day deposit rate You need to purchase CHF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is: 3) An importer of Swiss watches has an account payable of CHF750,000 due in 90 days. The following data is available: Rates and prices in US-cents/CHF. Spot rate: 71.42 cents/CHF 90-day forward rate: 71.14 cents/CHF US dollar 90-day interest rate: 3.75% per year Swiss franc 90-day interest rate: 5.33% per year Option Data in cents/CHF Strike Call 2.55 1.55 Put 1.42 2.40 a) Assess the USD cost to the importer in 90 days if it uses a call option to hedge its CHF750,000 account payable. Use the call with a strike price of 72 cents/CHF and include the option call premium in the cost. b) What will be the cost of the payable in 90 days if a forward contract is used? c) By how much must the CHF weaken relative to the USD, from 71.42 cents/CHF before the call option provides a lower cost than the forward hedge?

Answer 1

1) Accounts receivable in 1 year NZ$600,000

Step 1 - Borrow NZ$ - Borrow the PV of NZ$600,000 at the NZ borrowing rate of 10% = 600000/(1.10)=NZ$545,454.54

Step 2 - Convert NZ$ into US$ - NZ$545,454.54 = US$212,727.27@ spot rate $0.39/NZ$

Step 3 - Invest the converted amount at US deposit rate of 11% for 1 year-US$212,727.27

Step 4 - Receive the investment in US$ with interest=US$236,127.27

Step 5 - Repay the borrowing with the amount received NZ$600,000

The US$ value of exports in 1 year will be the amount received from investments i.e., US$236,126.27

2) Sum payable in 1 year CHF200,000

Step- 1 - Borrow US$ equivalent to the PV of the amount payable in CHF

PV of CHF 200,000 = 200,000/(1.05) = CHF190,476.19

Step 2 - Convert into US$ at spot rate = CHF190,476.19 = US$91,428.57

Step 3 - Invest US$91,428.57 at 6% for 1 year

Step 4 - Receive US$96,914.28 after 1 year

Amount of US$ required in 360 days for payment of CHF200,000 is US$96,914.28 using MMH

3)b) Cost of payable if forward contract is used = CHF750,000 * 71.14cents/CHF = US$533,550