rider.instructure.com 308 c10,translation.e FIN-308-L1-N1-FA17 Question 2 1 pts

Question

rider.instructure.com 308 c10,translation.e FIN-308-L1-N1-FA17 Question 2 1 pts FM (U.S.A.) recently signed a contract to sell networking gears to SwissComm, a Swiss internet provider, for CHF 185 million [CHF Swiss franc]. The sale was made in March with payment due 6 months later in September. Because this is a sizable contract for the firm and because the contract is in CHF rather than USD, JFM is considering several hedging alternatives to reduce the exchange rate risk arising from the sale. To help the firm make a hedging decision you have gathered the following information: USD 0.92 / CHF Spot rate Forward rate USD 0.91 / CHF DLK's forecasted rate Swiss borrowing rate-4% per year Swiss lending rate-2% per year US borrowing rate-6% per year US lending rate o USD 0.915 / CHF o 3% per year DLK's WACC 8% per year o Dec put options on CHF: Strike price = CHF 0.92/USD, premium is 1.5% CHF 185 If JFM chooses to hedge its transaction exposure in the forward market, it will million forward at a rate of Osell: USD 0.915/CHF O buy; USD 0.91/CHF buy: USD 0.92/CHF sell; USD 0.91/CHF 19

Explanation / Answer

Since JFM (USA) has foreign currency recievable i.e, CHF 185 mn. To hedge this transaction exposure via forward, It should sell CHF @current 6 month forward rate USD 0.91/CHF.

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