Grady Co. is a manufacturer of hockey equipment in Chicago, and will need 3 million Swiss francs (SF) in one year to pay for imported supplies. The U.S. one-year interest rate is 2% while Switzerland’s one-year interest rate is 7%. The spot rate of the SF is $.90. The one-year forward rate of the SF is $.88. A one-year call option on SF exists with an exercise price of $.90 and a premium of $.03 per unit. As the Treasurer of Grady Co., you think the spot rate of the SF is the best forecast of the future spot rate of the SF.
a. If you use a money market hedge, determine the amount of dollars that you will pay for the payables.
b. 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).
Enjoy 24/7 customer support for any queries or concerns you have.
Phone: +1 213 3772458
Email: support@gradeessays.com