Question

Dinkins, Inc. exported goods to Switzerland and will receive CHF 2 million in 90 days. Dinkins believes in IFE and IRP between the US Dollar and Swiss Franc. The 3 month forward rate of the Swiss Franc is USD 1.01/CHF. A 90-day put option is available with an exercise price of USD 1.03/CHF and a premium of USD .02/CHF.

Based upon the information above, which of the following would produce the most favorable outcome for Dinkins?

a) Purchase a Put Option

b) Sell Forward

c) Remain Unhedged

d) All of the actions will produce the same outcome

this is all the info provided

Answer 1

Dinkins Inc will receive CHF 2 million in 90 days

In case of Forward contract

3 months Forward rate USD1.01/CHF

Amount receive in USD after 90 days = 2 × 1.01 = USD 2.02 million

In case of Put option

Exercise price USD 1.03/CHF

Premium USD 0.02/CHF

On maturity, Amount receivable in USD = 2 × 1.03 = USD 2.06 million

Less: Premium = 2 × 0.02 = USD 0.04 million

Net amount receivable in USD = 2.06 - 0.04 = USD 2.02 million

Option d is correct: All of the actions will produce the same outcome.