Question

The forward rate of the Swiss franc (SF) is $0.50. The spot rate of the Swiss franc is $0.48. The following interest rates exist:

	U.S.	Switzerland
360-day borrowing rate	7%	5%
360-day deposit rate	6%	4%

Kriner Inc. needs to purchase SF200,000 in 360 days. Determine the amount of U.S. dollars needed in 360 days if Kriner Inc. uses a money market hedge.

Group of answer choices

$96,914

$101,904

$101,923

$92,307

$98,770

Answer 1

Amount to pay in SF in 360 days = SF200,000

Amount of SF to deposit today = Amount to pay in SF in 360 days / (1 + SF deposit rate)

Amount of SF to deposit today = SF200,000 / (1 + 4%) = SF192,308

$ required to purchase SF192,308 today =  SF192,308 * spot rate

$ required to purchase SF192,308 today =  SF192,308 * $0.48 = $92,308

$92,308 is borrowed today, and repaid after 1 year.

$ to repay after 1 year = $92,308 * (1 + $ borrowing rate)

$ to repay after 1 year = $92,308 * (1 + 7%)

$ to repay after 1 year = $98,770

The answer is $98,770