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Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment on a shipment of goods in three months. Because the payment will be in Swiss francs, the U.S. Company wants to hedge against a decline in the value of the Swiss franc over the next three months. The annual U.S. risk-free rate is 2 percent, and the Swiss risk-free rate is 5 percent. Today spot rate is $0.5974 dollars per Swiss franc.

a) Should the U.S. Company long or short a forward contract to hedge currency risk?

b) What is the the no-arbitrage price at which the U.S. Company could enter into a forward contract that expires in three months?

c) Thirty days later the spot rate is $0.55. What is the the value of the U.S. Companys forward position?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92796219

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