What is the future spot exchange rate that will generate

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Reference no: EM133331596

Question: Define exchange rate transaction exposure. (5 marks) b) Explain ONE (1) benefit of using currency options compared with forward contracts. (8 marks) c) A U.S company namely Risdaq Inc. is going to pay its supplier in Switzerland in three months for a total of the Swiss franc (SF)13,000. Given the spot exchange rate is $0.98/SF and the 3-month forward rate s $1.02/SF. Alternatively, the 3-month call option on SF would be exercised at $1.03/SF, with the premium being $0.05/SF. The 3-month interest rate is 8 percent in the U.S. and 6 percent in Switzerland. Assume that the expected future spot exchange rate is similar to the forward rate.

i) Calculate the payable in U.S. dollars if you decide to hedge using a forward contract.

ii) What is the future spot exchange rate that will generate the same result for forward and option market hedges?

iii) If the Swiss franc (SF) appreciates beyond $1.03/SF, what are the dollar costs of meeting the SF payable against the future spot exchange rate under options hedging

Reference no: EM133331596

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