Question

You plan to visit Geneva, Switzerland in three months 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 1.5 percent in the United States and 1 percent in Switzerland.

Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using money market.

Answer 1

Solution :- Given, Cost of SF - $5000 for lodging meals and transportertion spot Exchange rate = $0.601 SF 3 months forward rate = $063/3F Premium $0.05 per SF us and 1% in using money market 3 months interest rate is 1.5% in Switzo land Convert to Sf at the spot rate of $0.60/SF - 5000 x0.60 3000 Borrowing 3000 dollors at interest rate of 1.5% in US Interest 3000 X 15 -$45 put the money of 5000 in switzerland at interest rate of a one percent (1%) bank After 3 months we get soso SF from the the us bank a total pay Use sooo SF and need to of 3045$.

converting so sf to dollors 50 x 0.63 - $31.5 Total money owned in dollors = 3045 - 31.5 dollors - $3013:5