22. An FI must make a single payment of 500,000 Swiss francs in six months at...
Fantastic news! We've Found the answer you've been seeking!
Question:
![image text in transcribed](https://s3.amazonaws.com/si.experts.images/answers/2024/05/66486e5149e76_86466486e50b8364.jpg)
Transcribed Image Text:
22. An FI must make a single payment of 500,000 Swiss francs in six months at the maturity of a CD. The FI's in-house analyst expects the spot price of the franc to remain stable at the current $1.02/SFr. But as a precaution, the analyst is concerned that it could rise as high as $1.07/SFr or fall as low as $0.97/SFr. Because of this uncertainty, the analyst recommends that the FI hedge the CD payment using either options or futures. Six-month call and put options on the Swiss franc with an exercise price of $1.02/SFr are trading at 4 cents and 2 cents per SFr, respectively. A six-month futures contract on the Swiss franc is trading at $1.02/SFr. a. Should the analyst be worried about the dollar depreciating or appreciating? b. If the FI decides to hedge using options, should the FI buy put or call options to hedge the CD payment? Why? c. If futures are used to hedge, should the FI buy or sell Swiss franc futures to hedge the payment? Why? d. What will be the net payment on the CD if the selected call or put options are used to hedge the payment? Assume the following three scenarios: the spot price in six months will be $0.97, $1.02, or $1.07/SFr. Also assume that the options will be exercised. e. What will be the net payment if futures had been used to hedge the CD payment? Use the same three scenarios as in part (d). f. Which method of hedging is preferable after the fact? 22. An FI must make a single payment of 500,000 Swiss francs in six months at the maturity of a CD. The FI's in-house analyst expects the spot price of the franc to remain stable at the current $1.02/SFr. But as a precaution, the analyst is concerned that it could rise as high as $1.07/SFr or fall as low as $0.97/SFr. Because of this uncertainty, the analyst recommends that the FI hedge the CD payment using either options or futures. Six-month call and put options on the Swiss franc with an exercise price of $1.02/SFr are trading at 4 cents and 2 cents per SFr, respectively. A six-month futures contract on the Swiss franc is trading at $1.02/SFr. a. Should the analyst be worried about the dollar depreciating or appreciating? b. If the FI decides to hedge using options, should the FI buy put or call options to hedge the CD payment? Why? c. If futures are used to hedge, should the FI buy or sell Swiss franc futures to hedge the payment? Why? d. What will be the net payment on the CD if the selected call or put options are used to hedge the payment? Assume the following three scenarios: the spot price in six months will be $0.97, $1.02, or $1.07/SFr. Also assume that the options will be exercised. e. What will be the net payment if futures had been used to hedge the CD payment? Use the same three scenarios as in part (d). f. Which method of hedging is preferable after the fact?
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
What is the type of the expressions computed on these two lines? 4 > 5 print (4>5)
-
Describe the concept of Six Sigma quality. Why is such a high quality level important?
-
The proposed rates were not in the range the CEO expected given the pricing analysis. The CEO has asked the pricing actuary to verify the total projected loss cost excluding potential large storm...
-
a. Expand the cash budget you created in Problem 10.4 to include a row for expected cash outflows equal to 77% of the current months sales. b. Also add a row to calculate the amount of cash that...
-
Phillips Industries runs a small manufacturing operation. For this fiscal year, it expects real net cash flows of $190,000. Phillips is an ongoing operation, but it expects competitive pressures to...
-
Read the corporate governance statement with respect to board composition and evaluate whether the company has a balanced board as prescribed by the Malaysian Code on Corporate Governance 2017....
-
The average annual return for the S&P 500 from 1886 to 2020 is 11.5%, with a standard deviation of 17%. Based on these numbers, what is a 95% confidence interval for 2021's returns? OA. -7.5%, 30.5%...
-
Who might be particularly interested in each of the following types of ratio: Profitability Liquidity Efficiency?
-
How can an investor explore the economic/market context in which the business operates?
-
Why do investors pay more for a business than the statement of financial position value of the net assets?
-
What non-financial factors might you consider when deciding whether or not to invest in a business?
-
Decide whether each of the following would be classified as an operating cash flow, an investing cash flow, or a financing cash flow: a) Proceeds of a share issue. b) Purchase of property. c)...
-
A normal breath is about 1 L in volume. Assume you take a breath at sea level, where the pressure is 760 mmHg. Then you instantly (this is a thought experiment, after all) go to Los Alamos, New...
-
For the given transfer function: Vo(s) / Vi(s) = (s^2C^2R^2 + 1) / (s^2C^2R^2 + 4sCR + 1) Assumiing that 1/(CR) = 120 PI so write the matlab code to find the magnitude plot
-
Which statement best describes which theoretical perspective nurse managers should use to motivate their employees? A. Each employee has individual needs, so no one theory applies to all employees....
-
Think of a time when you have been very satisfied with a job you have held. What made that job satisfying? Also think of a time when you have been dissatisfied with a job you have held. What made...
-
Which statement might have been made by a manager who espouses the Theory X approach to management? A. Employees on my unit are very goal-directed and need little supervision to get the job done. B....
![Mobile App Logo](https://dsd5zvtm8ll6.cloudfront.net/includes/images/mobile/finalLogo.png)
Study smarter with the SolutionInn App