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
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.
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