: Suppose the exchange rate on the 180-day forward contract on the Swiss franc i

Question

: Suppose the exchange rate on the 180-day forward contract on the Swiss franc is $0.80 per Swiss franc. Current spot exchange rate is $0.70. You live in the U.S. but are considering the purchase of a shipment of Swiss watches costing 10 million Swiss francs. The merchant in Zurich has promised you that the cost of the shipment will not change over the next 180 days. But you worry that the dollar will weaken further against the Swiss franc, making the dollar-cost of the shipment more expensive than at present. To hedge this foreign exchange risk, you buy the 180-day forward contract on Swiss francs at the quoted rate. With a forward contract, calculate the total cost in USD.

Explanation / Answer

1)
without forward contract,
cost of watches excl. shipment cost in dollars at the time of shipment
(since shipment cost does not change)
=10000000 * 0.75 ($) = 7500000 ($) (ANSWER)
2)
with forward contract bought at $0.80 /SF ,
at the time of shipment, cost of 10000000 SF= 10000000*0.80 = 8000000 ($)
(ANSWER)

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