Comparison of Hedging Techniques You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United States is 7 percent, and the one-year interest rate in Switzerland is 9 percent. You believe that today’s spot rate of the Swiss franc ($0.85) is the best predictor of the spot rate one year from now. You consider these alternatives: I Hedge with one-year for ward contract Hedge with a money market hedge Hedge with at-the-money put options on Swiss francs with a one-year expiration date Remain unhedged Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.
International Financial Management
International Financial Management
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Comparison of Hedging Techniques You own a U.S. exporting firm that will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transaction costs. Today the oneyear interest rate in the United States is 7 percent, and the one-year interest rate in Switzerland is 9 percent. You believe that today’s spot rate of the Swiss franc ($0.85) is the best predictor of the spot rate one year from now. You consider these alternatives:
I Hedge with one-year for ward contract
Hedge with a money market hedge
Hedge with at-the-money put options on Swiss francs with a one-year expiration date
Remain unhedged
Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.
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