Starbucks Corp., a US company, has a plan to build 30 cafes in Switzerland. Star
ID: 2794257 • Letter: S
Question
Starbucks Corp., a US company, has a plan to build 30 cafes in Switzerland. Starbucks has hired O’Neill Construction, a Swiss company, to build these cafes, at a cost of CHF 60,000,000. The payment (in the Swiss currency) is due in nine (9) months.
Starbucks is given the following information:
Spot rate = CHF 1.54 / USD
9-month forward rate = CHF 1.49 / USD
Interest rate in Switzerland = 12% per year
Interest rate in U.S.A. = 6% per year
Starbucks’s own forecast suggests that the spot rate 9 months from now is most likely CHF 1.55 / USD. If the firm uses the unhedged position, how much USD will it need in 9 months?
A. USD38,961,000Explanation / Answer
US Dollor Spot Rate = 1/CHF
=1/1.54
=0.6494$
9 month Interest Spot Rate =0.6494 (1.045) i.e 6*9/12
=0.6786 $
9 Mionths Forward Rate = 1/1.49
=0.6711
Starbucks Own Forecast
US Dollor Spot Rate =1/1.55
=0.6452
9 Months Interest Spot Rate =0.6452 (1.045) i.e 6*9/12
=0.6742
Starbucks Forecast 9 month Interest Rate = 0.6742 $
Forward Cover Rate = 0.6711$
Since Forward Rate is best Option because Lower Dollor Rates
USD Needed For 9 months = 60,000,000*0.6711$
=40266000$
Since Option C is Correct
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