Calculate gretchen''s gain or loss at closing spot

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Reference no: EM13488235

Gretchen Van Damme, a US based firm will receive 1.25 millions of dividends in Swiss Francs in December 2014. The firm is considering buying American put options on Swiss francs on the International Monetary Market of the Chicago Mercantile Exchange with a December expiration date and a strike price of USD1.05/CHF. The current spot rate of exchange is USD1.05/CHF. Gretchen believes that the spot Swiss franc exchange rate in December will be between USD1.00/CHF and USD1.10/CHF, with a most likely value of USD1.05/CHF.
a. Calculate Gretchen's gain or loss at closing spot rates of USD1.00/CHF, USD1.05/CHF and USD1.10/CHF if the firm does not hedge.
b. Diagram the intrinsic value of Gretchen's Swiss franc put option at expiration.
c. If the option premium is USD0.0134/CHF, diagram the profit or loss on Gretchen's Swiss franc put option at expiration as a function of the underlying SUSD/CHF exchange rate.
d. Diagram Gretchen's net gain or loss at closing spot rates of USD1.00/CHF, USD1.05/CHF and USD1.10/CHF if the firm do hedge with Swiss franc put option.

Reference no: EM13488235

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