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1.    Consider a U.S.-based company that imports goods from Switzerland. The U.S. Company expects to make payment on a shipment of goods in six months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a negative change in the value of the Swiss franc over the next six months.  The U.S. risk-free rate is 2 percent, and the Swiss risk-free rate is 6 percent. Assume that interest rates are expected to remain fixed over the next six months. The current spot rate is USD0.5842/1CHF

 

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 six months. 

    • 9 years ago
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