1. If the spot rate for the Swiss Franc is that 1.15 SF is equal to 1 US $, and

Question

1. If the spot rate for the Swiss Franc is that 1.15 SF is equal to 1 US $, and the annual interest rate on fixed rate one-year deposits of SF is 0.25% and for US$ is 1.75%, what is nine-month forward rate for one dollar in terms of SFs? Assuming the same interest rates, what is the 18-month forward rate for one SF in US$s? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the SF get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations for Switzerland as compared to the US?  

2. On June 1st, 2016, Swatch expects to ship 3,500,000 watches from its Swiss plant to the US that it will sell through retail outlets on 270-day terms at $65 each. Therefore Swatch will receive payment from these outlets on February 25th, 2017. Assuming that Swatch needs to cover its expenses in Switzerland and thus wants to hedge its SF/US$ exposure using a forward contract with a Swiss bank, what is the minimum amount of Swiss Francs they should receive on February 25th, 2017 given the 9-month forward rate you calculated in problem one for one US dollar in terms of Swiss Francs? What are two other ways Swatch might hedge its SF/US$ exposure?

**Show details***

Explanation / Answer

Spot Rate :

1.15 SF = 1 $

SF Interest Rate :

0.25%

$ Interest Rate :

1.75%

As per IRPT Concept

FR (SF / $ ) =

1 + SF Interest Rate

SR ( SF / $ ) =

1 + $ Interest Rate

FR (SF / $ ) =

1 + 0.25/12*9

1.15 =

1 + 1.75/12*9

FR after 9 months ( SF / $ ) = 0.590

FR (SF / $ ) =

1 + 0.25/12*18

1.15 =

1 + 1.75/12*18

FR after 9 months ( SF / $ ) = 0.436

It’s a direct quote rate, based on above calculations it is proved that SF is a stronger currency as compare to $. It’s all happen because of higher interest rate of US economy. It’s also shows that Switzerland has lower inflation rate as compare to US.

Spot Rate :

1.15 SF = 1 $

SF Interest Rate :

0.25%

$ Interest Rate :

1.75%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.