Question

Suppose that your company believes the Swiss franc will appreciate versus the U.S. dollar in the...

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

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Homework Answers

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

For any query or clarification, please leave a comment.

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