Hedging with Forwards and Options: One year from today, you will be receiving CHF 500,000, but...

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Hedging with Forwards and Options: One year from today, you will be receiving CHF 500,000, but you would prefer dollars. The current spot rate is CHF 0.92 per USD, and the one year forward rate is CHF 0.96 per USD. The USD interest rate is 3.6% and the CHF interest rate is 3.2%. You can invest in long or short put or call options with an underlying asset of CHF, a strike price of 0.94 CHF per dollar and a premium of 1.5% of the USD value of the underlying asset. Would you be better off hedging this exposure using a forward contract or a forward market hedge? Why? (10 points) b. If you were going to hedge with options, what are the terms of the option you would use? (10 points) C. If the spot rate in 1 year is CHF 0.99 per USD, would you be better off with the hedge you suggested in Part A or Part B? (10 points) Hedging with Forwards and Options: One year from today, you will be receiving CHF 500,000, but you would prefer dollars. The current spot rate is CHF 0.92 per USD, and the one year forward rate is CHF 0.96 per USD. The USD interest rate is 3.6% and the CHF interest rate is 3.2%. You can invest in long or short put or call options with an underlying asset of CHF, a strike price of 0.94 CHF per dollar and a premium of 1.5% of the USD value of the underlying asset. Would you be better off hedging this exposure using a forward contract or a forward market hedge? Why? (10 points) b. If you were going to hedge with options, what are the terms of the option you would use? (10 points) C. If the spot rate in 1 year is CHF 0.99 per USD, would you be better off with the hedge you suggested in Part A or Part B? (10 points)

Answer rating: 100% (QA)

a Hedging with a Forward Contract vs Forward Market Hedge In this case the better option would be to use a forward contract to hedge the exposure The ... View the full answer