You plan to visit Geneva, Switzerland, in three months to attend an international business conference....
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You plan to visit Geneva, Switzerland, in three months to attend an international business conference. You expect to incur a total cost of SF7,000 for lodging, meals and transportation during your stay. As of today, the spot exchange rate is $0.65/SF and the three-month forward rate is $0.70/SF. You can buy the three-month call option on the SF with an exercise price of $0.72/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland.
Calculate your expected dollar cost of buying SF10,000 if you choose to hedge by a call option on SF. (3 marks)
Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract. (2 marks)
At what future spot exchange rate will you be indifferent between the forward and option market hedges? (5 marks)
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