36. Assume the following information: U.S. deposit rate for 1 year = 11% U.S. bo

Question

36. Assume the following information: U.S. deposit rate for 1 year = 11%

U.S. borrowing rate for 1 year = 12%

Swiss deposit rate for 1 year = 8%

Swiss borrowing rate for 1 year = 10%

Swiss forward rate for 1 year = $.40

Swiss franc spot rate = $.39

Also assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive SF600,000 in 1 year. Using the information above, what will be the approximate value of these exports in 1 year in U.S. dollars given that the firm executes a forward hedge? SHOW ALL WORK

a. $234,000.

b. $238,584.

c. $240,000.

d. $236,127.

Explanation / Answer

Total amount receive after one year = SF 600,000

1 year forward rate = $0.4 per SF

Approximate value of exports in 1 year in U.S. dollars is calculated below:

Value in 1 year = SF 600,000 × $0.40

                         = $240,000

Approximate value of exports in 1 year in U.S. dollars is $240,000.

Hence, option (C) is correct answer.

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