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What is the expected cost

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The U. S- based MNC Kline has payables of CHF 250,000 in nine months. The firm's economist forecasts that the CHFUSD could end the period with a value of either 1.10 (probability of 55 percent) or 1.00 (45 percent). The firm is concerned about its currency risk. It has also assessed some hedging alternatives. Nine- month CHFUSD forward contracts are traded at 1.06. The nine- month interest rates (annual compounding) in the United States and Switzerland are 1.5 percent and 0.5 percent, respectively. Call options with nine- month expiration and a strike price of USD 1.07 are available for a premium of USD 0.037. Assume that the spot rate is USD 1.05. What is the expected cost (and the corresponding standard deviation) if company uses forward hedge? (use $x,xxx and $x,xxx)

Reference no: EM131903422

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