In: Accounting
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%
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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.