Question

1.Assume that a U.S. exporter denominates its Swiss exports in Swiss francs and expects to receive...

1.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 below, determine how much the company will receive in dollars if they decide to use a money market hedge. TO GET FULL CREDIT, CLEARLY SHOW ALL OUR WORK.

U.S. rate for 1 year

=

11%

Swiss rate for 1 year

=

10%

Swiss franc spot rate

=

$.39

Homework Answers

Answer #1

Money Market Hedge:

Swiss Francs are RECEIVABLE. Therefore, we need to create a liability in Swiss Francs.

Borrow Swiss Francs and Invest in $.

STEPS:

Now,

(1)   Borrow Swiss Francs for 1 year so that, Swiss Francs payable after 1 year along with interest will be SF 600000. Therefore, Borrow 600000/[1+0.1] = SF 545454.54

(2)   Convert SF into $ at Spot Rate and Receive 545454.54*0.39 = $212727.27

(3)   Invest $212727.27 for 1 year.

After 1 year,

(4)   Receive SF 600000

(5)   Repay the borrowings along with interest. 545454.54+10% = SF 600000

(6)   Realize the Investments along with interest. 212727.27+11% = $236127.27

Amount Receivable = $236127.27

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