Calculate the no-arbitrage price

Assignment Help Financial Management

Reference no: EM131851338

Regarding this question especially for part c while Calculating the value of the U.S. Company’s forward position why was it inferred that a profit to the short position was obtained depsite that the figure was negative and please explain and show me how i can iluustrate this scenario in grpah illustating how hedging enable the US comapny to profit in this case.

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 a decline in the value of the Swiss franc over the next three months. The U.S. risk-free rate is 2 percent, and the Swiss risk-free rate is 5 percent. Assume that interest rates are expected to remain fixed over the next six months. The current spot rate is $0.5974

a. Indicate whether the U.S. Company should use a long or short forward contract to hedge currency risk.

b. Calculate the no-arbitrage price at which the U.S. Company could enter into a forward contract that expires in three months.

c. It is now 30 days since the U.S. Company entered into the forward contract. The spot rate is $0.55. Interest rates are the same as before. Calculate the value of the U.S. Company’s forward position.

Reference no: EM131851338

Questions Cloud

What is current share price : The required return on the stock is 13 percent. What is the price of the stock 9 years from today? What is the current share price?

What are the major findings in this article : Has the author(s) been objective in his/her discussion of the topic? Explain and utilize examples from the article. (Hint: is the author biased?)

Use born approximation to calculate reflection coefficients : Use the first Born approximation to calculate the ratio and Use the Born approximation to calculate the reflection coefficients

Independent of members in practice of public accounting : The requirement for independent of members in the practice of public accounting is explained in the AICPA code of professional conduct rule number?

Calculate the no-arbitrage price : Calculate the no-arbitrage price at which the U.S. Company could enter into a forward contract that expires in three months.

Create application that contains a textbox for persons name : Create a application that contains a textbox for person's name. Plan that user may enter only first and last name or they may enter first, middle and last name.

Create a application that contains two textboxes and buttons : Create a Windows application that contains two textboxes and two buttons. The textboxes should be used to allow the user to input two positive numeric values.

Worthwhile to incur compensating balance : What interest rate would make it worthwhile to incur a compensating balance of $22,000 in order to get a 1 percent lower interest rate on a 1 year,

Determine miles per gallon for a given trip : Create a Trip Calculator Windows application that can be used to determine miles per gallon for a given trip.

User Account

All Pages