On June 1st, 2016, Swatch expects to ship 3,500,000 watches from its Swiss plant

Question

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?

Explanation / Answer

In the absence of information, assuming the forward rate used for hedging is 1 SF = 1.04 $

Total revenue = $ 227500000

Minimum amount of SF should be calculated using forward rate

= 227500000/1.04 = SF 218750000

Following are the other two ways Swatch might hedge its exposure:

1. By taking future contracts

2. By taking option contracts

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