An American insurance company issued $10 million of one-year, zero-coupon GICs (guaranteed investment contracts) denominated in Swiss...

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Finance

An American insurance company issued $10 million of one-year,zero-coupon GICs (guaranteed investment contracts) denominated inSwiss francs at a rate of 5 percent. The insurance company holds noSFr-denominated assets and has neither bought nor sold francs inthe foreign exchange market.
What is the insurance company’s net exposure in Swissfrancs?
What is the insurance company’s risk exposure to foreignexchange rate fluctuations?
page 770How can the insurance company use futures to hedge therisk exposure in part (b)? How can it use options to hedge?
If the strike price on SFr options is $1.0425/SFr and the spotexchange rate is $1.0210/SFr, what is the intrinsic value (onexpiration) of a call option on Swiss francs? What is the intrinsicvalue (on expiration) of a Swiss franc put option? (Note:Swiss franc futures options traded on the Chicago MercantileExchange are set at SFr125,000 per contract.)
If the June delivery call option premium is 0.32 cent per francand the June delivery put option is 10.7 cents per franc, what isthe dollar premium cost per contract? Assume that today’s date isApril 15.
Why is the call option premium lower than the put optionpremium?

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Answer to Question No 1 The net exposure of the Insurance Company to the Swiss Frances is given by Net Exposure of the insurance company in Swiss Francs Assets denominated in Swiss FrancsLiabilities Denominated in Swiss FrancsSwiss Francs BoughtSwiss Francs Sold As given in the questionThe company has not brought or sold Swiss Francs and neither owns any assets in Swiss FrancsHowever it has a liabilities of 10 million denominated in Swiss Francs Sosubstituting these values into the formula for net exposure for the insurance company we get Net Exposure to the insurance company in Swiss Francs 010 millions00 ie 10 millions Answer to Question No 2 The insurance company has liabilities in Swiss FrancsIn other words it is holding a shortseller position in Swiss Francs Hence the company See Answer

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