# Money Market versus Put Option Hedge Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing funds. The one-year Swiss interest rate is 9 percent when investing funds and 11 percent when borrowing funds. The spot rate of the Swiss franc is \$0.80. Narto expects that the spot rate of the Swiss franc will be \$0.75 in one year. A put option is available on Swiss francs with an exercise price of \$0.79 and a premium of \$0.02 Determine the amount of dollars that Narto Co. will receive at the end of one year if it implements a money market hedge. Determine the amount of dollars that Narto Co. expects to receive at the end of one year (after accounting for the option premium) if it implements a put option hedge.

FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698
FindFind

### International Financial Management

14th Edition
Publisher: Cengage
ISBN: 9780357130698

#### Solutions

Chapter 11, Problem 52QA
Textbook Problem

## Money Market versus Put Option Hedge Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in one year. The one-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing funds. The one-year Swiss interest rate is 9 percent when investing funds and 11 percent when borrowing funds. The spot rate of the Swiss franc is \$0.80. Narto expects that the spot rate of the Swiss franc will be \$0.75 in one year. A put option is available on Swiss francs with an exercise price of \$0.79 and a premium of \$0.02 Determine the amount of dollars that Narto Co. will receive at the end of one year if it implements a money market hedge. Determine the amount of dollars that Narto Co. expects to receive at the end of one year (after accounting for the option premium) if it implements a put option hedge.

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