Problem $8\mathrm{.}3$

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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 SF$7,200$ for lodging, meals, and transportation during your stay. As of today, the

spot exchange rate is $$0\mathrm{.}60$ per swiss franc and the three$-$month forward rate is $$0\mathrm{.}74$ per swiss franc. You can

buy the three$-$month call option on SF with an exercise price of $$0\mathrm{.}75$ per swiss franc for the premium of $$0\mathrm{.}05$

per swiss franc. Assume that your expected future spot exchange rate is the same as the forward rate. The

three$-$month interest rate is $8$ percent per annum in the United States and $5$ percent per annum in Switzerland.

Required:

a$.$ Calculate your expected dollar cost of buying SF$7,200$ if you choose to hedge by a call option on SF$.$

b$.$ Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.

c$.$ At what future spot exchange rate will you be indifferent between the forward and option market hedges?

Complete this question by entering your answers in the tabs below.

Calculate your expected dollar cost of buying SF$7,200$ if you choose to hedge by a call option on SF$.$

Note: Do not round intermediate calculations. Round your answer to $2$ decimal places.

Total expected cost