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An importer of Swiss watches has an account payable of CHF950,000 due in 90 days....

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Finance

  1. An importer of Swiss watches has an account payable of CHF950,000 due in 90 days. The following data is available:

Rates and prices in US-cents/CHF.

Spot rate: 71.42 cents/CHF

90-day forward rate: 71.14 cents/CHF

Option Data in $ cents/CHF

_______________________________

Strike Call Put

70 2.55 1.42

72 1.55 2.40

_______________________________

  1. Assess the USD cost to the importer in 90 days if it uses a call option to hedge its CHF750,000 account payable. Use the call with a strike price of 72 cents/CHF for parts a) and c). Be sure to include the call premium in calculating the cost of the account payable, and ignore opportunity costs associated with interest rates.
  2. What will be the cost of the payable in 90 days if a forward contract is used?

c) By how what percentage must the CHF weaken relative to the USD, from the current spot rate of 71.42 cents/CHF before the call option provides a lower cost than the forward hedge?

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