Question

Suppose that your company believes the Swiss franc will appreciate versus the U.S. dollar in the coming three-month period. Your company has $500,000 to invest. The current spot rate is $0.9820/SF, the three-month forward rate is $0.9640/SF, and you expect the spot rates to reach $1.0250/SF in three months. What will be your company’s profit / loss if you buy Swiss franc and keep for 3 months?

A. USD 12,500

B. CHF12,500

C. Unknown today

D. USD 21,800

E. None of the above is correct

Answer 1

Buying Swiss Francs today at Spot Rate of $0.9820/SF

Amount of Investment in USD / Spot Rate of 1SF = $0.9820

= $500000/0.9820

= 509165 SF

Selling SF after 3 months at 3 Month Spot Rate of $1.0250/SF

= SF 509165 * 1.0250

= $ 521,894

Net Profit = Sale Consideration - Cost of Acquisition

=$ 521894 - $ 500000

= $ 21894 Approx.

Answer is d) i.e. USD 21,800 Approx

Spot Rate 1SF = $0.9820

3 Month Forward Rate 1SF = $0.9640

3-Month Spot Rate 1SF = $1.0250

1$ = 1/1.0250 SF

1$ = 0.9756 SF

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