You plan to visit Lugano, Switzerland, in six months to attend an international business conference. You expect to incur a total cost of SF6,000 for accommodation, meals, and transportation during your stay. As of today, the spot exchange rate is $0.68/SF and the six- month forward rate is $0.64/SF. You can buy the six-month call option on SF with an exercise price of $0.65/SF for the premium of $0.04 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The six-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland. Both interest rates are quoted as nominal rate. (a) (3 points) Calculate the future dollar cost of dealing with this SF “payable” if you decide to use the money market hedge. (b) (2 points) Calculate the future dollar cost of dealing with this SF payable if you decide to use the forward market hedge. (c) (5 points) Calculate your expected dollar cost of dealing with this SF payable if you decide to use the option market hedge. (d) (3 points) At what future spot exchange rate will you be indifferent between the money and option market hedges? (e) (3 points) At what future spot exchange rate will you be indifferent between the forward and option market hedges?
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