(c) What can you conclude from your observation in part b?
2. Your U.S. based MNC will be paying 400,000 Swiss Francs in six months. Your economist has forecast the Swiss franc’s spot rate in six months as follows:
Probability
Future Spot Rate
20%
0.65
50%
0.60
30%
0.55
Your treasurer has identified three possible hedging alternatives
I. Six month forward contract at 0.60
II. Money market alternatives with borrowing and leaning rates in U.S. at 5% and 2% respectively; while in Switzerland at 6% and 4%
III. Six month Call options with a strike price of 0.60 are available for a premium of $0.03 per unit
IV. Six month Put options with a strike price of 0.60 are available at a premium of $0.02 per unit
If the current spot rate is $0.62, which hedging alternative is the best for your MNC? (Show all your steps for the money market hedge calculation). You can fill the following table with cash flows expected in each scenario.
Probability
Future Spot Rate
Cash flow with forward hedge
Cash flow with option hedge
Cash flow with money market hedge
20%
0.65
50%
0.60
30%
0.55
