On the 1st of October 2018, Advancelook SA, a middle size Swiss company operating in the internal design sector, sold the commercial rights for the development and sale of its key products, an advanced range of stainless steel shelving furniture, to Allinwood (California) for U.S. Dollars ($) 6.5m (million), with $ 3m being payable at the end of March 2019 and the remaining $ 3.5m to be paid at the end of June 2019. The price was calculated by applying to the original valuation of Swiss Franc (CHF) 8.125m of the trademark rights in September 2018 the then-current exchange rate of $0.80/CHF.

By the time the order was received and booked in October, the $ had strengthened to $0.77/CHF, so the sale was in fact worth CHF 8,441,558.44. Therefore, Advancelook SA had already gained another CHF 316,558.44 from favorable exchange rate movements. Nevertheless, Advancelook SA’s Director of Finance now wondered if the company should hedge against a reversal of the recent trend of the $. Advance look SA estimates its cost of equity capital to be 9.5% per annum. As a relatively small firm, Advancelook SA is unable to raise funds using long-term Swiss debt (current Switzerland Government Bond yield 1.9% per annum).

Note: Assume there are 360 days in a year

(i) Advancelook SA could use a forward market hedge to manage its foreign currency exposure. The 6-month forward exchange quote is $ 0.76/CHF and the 9-month forward exchange quote is $ 0.74/CHF. Both contracts expire at the end of the month. Calculate what would be the outcome of this approach for Advancelook SA at the end of June 2019.

(ii) Advancelook SA could use a money market hedge to manage its foreign currency exposure. Advance look SA could borrow $ from the Los Angeles branch of Goldman Sachs at 8.5%. Calculate what would be the outcome of this approach for Advancelook SA at the end of June 2019.

(iii) Advancelook SA could hedge its foreign currency exposure with foreign currency options written on the $. March put options are available at a strike price of $ 0.77/CHF for a premium of 2.5% of the $ value of the option, and June put options are available at a strike price of $ 0.76/CHF for a premium of 2.1% of the $ value of the option. March call options are available at a strike price of $ 0.77/CHF for a premium of 2.7% of the $ value of the option, and June call options are available at a strike price of $ 0.76/CHF for a premium of 2.3% of the $ value of the option. All currency options maturity date is at the end of the month and these are over-the-counter option contracts. Calculate what would be the outcome of this approach for Advancelook SA at the end of June 2019.

(iv) Compare and briefly comment on the implications of the different outcomes for Advancelook SA of the approaches in i), ii) and iii) at the end of June 2019.