A U.S. based MNC has just signed a contract with a Swiss company that calls for the
Question:
A U.S. based MNC has just signed a contract with a Swiss company that calls for the U.S. MNC to provide the Swiss company with a variety of consumer goods over a three-month period that entails payments in Swiss francs (SF). The current dollar value of the SF contract is $286 million based on the current exchange rate of $1.0832/SF. At the same time the U.S. company signs a three-month contract with another Swiss company to buy supplies for three-month delivery and agrees to settle its bill in Swiss francs. The dollar value of the SF contract is $91.024 million, also base on the same exchange rate. At the same time, the U.S. MNC signs a contract to export its consumer goods to Saudi Arabia and receive payment in Saudi riyals (SR) in three months. The dollar value of the Saudi riyal contract is $81 million (Saudi Arabia pegs its currency value to the dollar at the fixed rate of $0.2700/SR). The U.S.-based MNC is particularly worried about a high degree of uncertainty in the foreign exchange markets. So, it decides to evaluate its hedging alternatives. The following information is available:
Spot : $1.0832/SF Bid $1.0896/SF Ask
SF3-month forward $1.0883/SF Bid $1.0894/SF Ask
SF6-month forward $1.0889/SF Bid $1.0894/SF Ask
SR 3-month Forward* $0.2688/SR Bid $0.2712/SR Ak
SF 3-month futures $1.0884/SF Bid $1.0888/SF Ask
SF 90-day call option #1 $1.1010/SF strike $0.0146/SF premium
SF 90-day put option #1 $1.1010/SF strike $0.0120/SF premium
SF 180-day call option #2 $1.1020/SF strike $0.0242/SF premium
SF 180-day put option #2 $1.1020/SF strike $0.0312/SF premium
90-day dollar interest rate 5.20% p.a. (deposit) 7.20% p.a. (loan)
90-day SF interest rate 4.60% p.a. (deposit) 5.80% p.a. (loan)
90-day Saudi interest rate 0% p.a. (deposit) 0% p.a. (loan)
* Only Forward contracts are available on the SR (no futures and no options).
Specify exactly what your exposure is (currencies and amounts). List (only list) all the hedging instruments that you should consider.
Expert Answer:
Exposure 1 Swiss Franc SF Exposure Contract to provide consumer goods with a value of 286 million Co... View the full answer
