2. A Swiss company doing business in the United States wants to lock in exchange
ID: 2813067 • Letter: 2
Question
2. A Swiss company doing business in the United States wants to lock in exchange rate risk by purchasing S50,000 of U.S currency at the six-month forward rate Exchange Rate Per U.S. $1 Swiss franc spot rate 1-month forward 3-month forward 6-month forward 0.9312 0.9307 0.9298 0.9284 0.6541 0.6543 0.6547 0.6552 U.K. pound spot rate 1-month forward 3-month forward 6-month forward Based upon spot and forward rates in the table shown, how much more would they be paying in Swiss francs to buy the U.S currency at the six-month forward rate than if they bought the same amount of currency at the spot rate? A. 150 Swiss francs B. 180 Swiss francs C.220 Swiss francs D. 140 Swiss francsExplanation / Answer
Here, a Swiss company entered into a Forward Contract to lock exchange rate risk by purchasing $50,000 US currency.
We need to calculate the cash flow at six month forward rate.
Cash flow = (Purchasing amount of US dollars*Swiss franc spot rate) - (Purchasing amount of US dollars*Swiss franc 6 month forward rate)
cash flow= ($50,000*0.9312) - ($50,000*0.9284)
= 46,560 - 46,420 = 140 Swiss francs
Hence, Swiss company will pay 140Swiss francs more to buy the US currency.
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