Question

. Consider a U.S.-based company that exports goods to Switzerland. The U.S. Company expects to receive payment of 100 million SF 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 U.S. risk-free rate is 2 percent, and the Swiss risk-free rate is 5 percent. Assume that interest rates are expected to remain fixed over the next six months. The current spot rate is $0.5974

Indicate whether the U.S. Company should use a long or short forward contract to hedge currency risk.

Describe how the company will do the money market hedge. Calculate the profit in USD that the company will make if they use the money market hedge.

Answer 1