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Question - A case of an account receivable: Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against the volatility in the foreign exchange rate. The U.S. risk-free rate is 5 percent, the Swiss risk-free rate is 2 percent and the US company's cost of capital is 11%. Assume that interest rates are expected to remain fixed over the next six months. The current spot rate is USD/0.5974CHF.
1. Explain whether a future appreciation in the swiss frank will harm or benefit the US company?
2. Calculate the forward price the company could use to hedge its position.
3. It is now 90 days since the U.S. Company entered into the forward contract. The spot rate is USD/0.5500CHF and the company is about to receive the payment. Interest rates are the same as before. Explain whether the company has made a mistake by entering into the forward contract or not.
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