You own a U.S. exporting firm and will receive 10 million Swiss francs in one year. Assume that interest parity exists. Assume zero transactions costs. Today, the one-year interest rate in the U.S. is 7%, and the one-year interest rate in Switzerland is 9%. You believe that today’s spot rate of the Swiss franc (which is $.85) is the best predictor of the spot rate one year from now. You consider these alternatives:
• Hedge with one-year forward contract,
• Hedge with a money market hedge,
• Hedge with at-the-money put options on Swiss francs with a one-year expiration date, or
• Remain unhedged.
Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.
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