Estimating the Hedged cost of Payables Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 percent for Switzerland’s one-year interest rate. The spot rate of the Swiss franc is $0.90, and the one-year forward rate of the Swiss franc is $0.88. A one-year call option on Swiss franc exists with an exercise price of $0.90 and a premium of $0.03 per unit. As the treasurer of Grady Co., you think the spot rate of the Swiss franc is the best forecast of the future spot rate of the Swiss franc. If you use a money market hedge, determine the amount of dollars that you will pay for the payables. If you use a call option hedge, determine the expected amount of dollars that you will pay for the payables (account for the option premium within your estimate).

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 11, Problem 59QA
Textbook Problem

Estimating the Hedged cost of Payables Grady Co. is a manufacturer of hockey equipment in Chicago, and it will need 3 million Swiss francs in one year to pay for imported supplies. The U.S. oneyear interest rate is 2 percent, versus 7 percent for Switzerland’s one-year interest rate. The spot rate of the Swiss franc is $0.90, and the one-year forward rate of the Swiss franc is $0.88. A one-year call option on Swiss franc exists with an exercise price of $0.90 and a premium of $0.03 per unit. As the treasurer of Grady Co., you think the spot rate of the Swiss franc is the best forecast of the future spot rate of the Swiss franc.

  1. If you use a money market hedge, determine the amount of dollars that you will pay for the payables.
  2. If you use a call option hedge, determine the expected amount of dollars that you will pay for the payables (account for the option premium within your estimate).

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