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A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot...

A U.S. firm has a payable of 125,000 Swiss francs in 90 days. The current spot rate is $.6698/SFr and the 90 day forward rate is $.6776/SFr.

90 day call option on SFr:      strike=$.68, premium=$.0096

90 day put option on SFr:       strike=$.68, premium=$.0105

Interest rates                           US       Switz.                          Possible spot rate in 90 days

90 day deposit rate                  3%     3%                             Spot                 Probability

90 day borrowing rate             3.2%    3.2%                            $.65                 10%

                                                                                                $.67                 20%

                                                                                                $.69                 70%

______________________________________________________________________

Calculate the expected dollar cost of the payable for each of the following:

(1) FORWARD HEDGE

(2) MONEY MARKET HEDGE

(3) OPTION HEDGE(S)

(4) REMAINING UNHEDGED

Should the firm hedge? If so, how? Consider both cost and risk in your decision.

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