5. You own a US company with borrowings from Switzerland. Over the next few mont

Question

5. You own a US company with borrowings from Switzerland. Over the next few months, your loan repayment of CHF 50 million is due. Given the foreign exchange market movements, you would like to minimise the impact on your cash outflow. Based on the following data, devise a suitable strategy. Evaluate your chosen strategy against suitable alternatives for a range of expected future spot rates. Spot rate 0.9888 CHF/USD 3 month forward rate 3 month future rate0.9796 CHF/USD Option Premia: Strike Price 0.9850 0.9900 Call Option 0.0108 0.0087 Put Option 0.0146 0.0175 Each option contract has a size of 125,000 Swiss Francs.

Explanation / Answer

A Loan Repayment               50,000,000 CHF B Spot Rate CHF per USD                       0.9888 C=A/B Amount in USD as per spot rate $     50,566,343.04 D 3 month forward /future rate 0.9796 E=A/D Amount in USD as per forward/future rate $     51,041,241.32 F Strike 0.9850 put option premium 0.0146 G Net Rate locked in (0.9850-0.0146) 0.9704 H Strike 0.9900 put option premium 0.0175 Net Rate locked in (0.9900-0.0175) 0.9725 (This amount is higher than Put option 0.9850) CHOSEN STRATEGY: BUY 0.9900 Put Option N=A/125000 Number of Contracts                             400 STRATEGY : BUY 400 Put Option Strike Price 0.9900 I=A *H Cost of buying put option                     875,000 J=I/B Cost of buying put option in US Dollar $                 884,911 Expected future spot rate : S K=(0.9900-S)*50m L=K/S M P=L-M Q=C-(50m/S) R=P+Q Gain on Option(CHF) Gain on Optionin USD Cost of Premium Net Gain /(loss)on put option Gain/(Loss) onspot rate Net Gain/(Loss) 0.9000                 4,500,000 $       5,000,000 $        884,911 $ 4,115,089 $       (4,989,213) $ (874,124) 0.9100                 4,000,000 $       4,395,604 $        884,911 $ 3,510,693 $       (4,378,712) $ (868,019) 0.9200                 3,500,000 $       3,804,348 $        884,911 $ 2,919,437 $       (3,781,483) $ (862,046) 0.9300                 3,000,000 $       3,225,806 $        884,911 $ 2,340,895 $       (3,197,098) $ (856,202) 0.9400                 2,500,000 $       2,659,574 $        884,911 $ 1,774,663 $       (2,625,146) $ (850,483) 0.9500                 2,000,000 $       2,105,263 $        884,911 $ 1,220,352 $       (2,065,236) $ (844,884) 0.9600                 1,500,000 $       1,562,500 $        884,911 $     677,589 $       (1,516,990) $ (839,401) 0.9700                 1,000,000 $       1,030,928 $        884,911 $     146,017 $          (980,049) $ (834,032) 0.9800                     500,000 $          510,204 $        884,911 $   (374,707) $          (454,065) $ (828,772) 0.9900                                 -   $                      -   $        884,911 $   (884,911) $               61,293 $ (823,618) 1.0000                                 -   $                      -   $        884,911 $   (884,911) $             566,343 $ (318,568) 1.0100                                 -   $                      -   $        884,911 $   (884,911) $         1,061,393 $   176,482 1.0200                                 -   $                      -   $        884,911 $   (884,911) $         1,546,735 $   661,824

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