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1) If the forward rate is CHF/USD = 0
1) If the forward rate is CHF/USD = 0.72 now, how much will Viner receive in dollars in 6 months according to the forward hedging? 2. Assume now the 6-month U.S. interest rate is 4% and the 6-month euro interest rate is 4.5%. Suppose now the current spot rate is CHF/USD = 0.73. How much will Viner receive in dollars in 6 months according to the money market hedging? 3. Assume now the put option has an exercise price of CHF/USD = 0.74 with a premium of $0.04. If the prediction of the spot rate in a year is as shown in the table below, how much will Viner receive in dollars in 6 months according to the option hedging? 4. Which hedging technique is optimal for Viner Co. now? 5. Should Viner Co. use the optimal hedging technique to hedge payables? Scenario The spot rate in a year Probability 1 0.71 60% 2 0.75 40%
Expert Solution
1. As per forward hedging, Viner will receive USD 200000/0.72 = USD 277,777.78
2. The Interest rate for CHF should be given instead of Euro.
As per money market hedging,
i) Viner will borrow CHF 200000/(1+0.045*6/12) = CHF 195599.02 such that maturity amount is CHF 200000
ii) Viner will convert the amount to USD at the current rate to get USD 195599.02/0.73 = USD 267943.87
iii) Viner will deposit the USD amount at 4% for 6 months to maturity amount of USD 267943.87*(1+0.04*6/12)
=USD 273302.74
Thus, as per money market hedging , Viner will receive USD 273302.74
3. For put option , total amount spent in premium = $0.04 *200000 =$8000
Again, the spot rate in 6 months should have been given
If the spot rate in 6 months is 0.71 (with a probability of 0.6)
, put option will not be exercised, and amount realised = $200000/0.71 =$281690.14
If the spot rate in 6 months is 0.75 (with a probability of 0.4)
, put option will be exercised, and amount realised = $200000/0.74 =$270270.27
Expected realisation = $281690.14*0.6+$270270.27*0.4 = $277122.19
Less value of premium after 6 months = $8000* (1+0.04*6/12) = $8160
Net realisation =$277122.19 - $8160 = $268962.19
d) Forward hedging is optimal as the amount in Dollars received is maximum in that case
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