Determine the total cost in dollars of hedging payable

Reference no: EM132208066

Question - Suppose it is Thursday, September 16, and origin, an import of Swiss watches to united state has an account payable of CHF 50,000 due on Wednesday, December 15.

Spot rate: $0.7142/CHF,

90 day forward rate $0.7144/CHF,

US Dollar 90 day interest rate: 3.75%,

Swiss Franc (CHF) 90 day interest rate: 5.33%

Options data for December contract, $/CHF

Strike 0.72, Premium call 0.0155, premium put 0.240

Required:

i) Determine the total cost in dollars of hedging payable using forward contract.

ii) Determine the maximum cost of hedging with an option contract

iii) On axes representing future exchange rate (x-axis) and total cost (y-axis) show the graph representing the following strategies adopted by origin

a) A do nothing strategy

b) Forward contract hedge strategy

c) An option contract hedge strategy.

Reference no: EM132208066

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