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Sir if u can give a short answer for this question please just for my knowledge, You own a U.S. exporting firm and will receive 10 million Swiss francs in 1 year. Assume that interest parity exists. Assume zero transaction costs. Today, the 1-year interest rate in the United States is 7 percent, and the 1-year interest rate in Switzerland is 9 percent. You believe that today’s spot rate of the Swiss franc (which is $.85) is the best predictor of the spot rate 1 year from now. You consider these alternatives:
? hedge with 1-year forward contract,
? hedge with a money market hedge,
? hedge with at-the-money put options on Swiss
francs with a 1-year expiration date, or
? remain unhedged.
Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.Always Appreciated
I don’t know where you found this question, but you must surely have an answer in the same book!!
Ask what it is in the answer that you are not clear about and then I will help you.
If you don’t have an answer then write your answer and I will tell you if I agree with it !!(Everything needed to be able to answer this is explained in detail in our free lectures)
Sir this was in our test in class for p4, i am not aware of which book but i would reallly appreciate an answer for this as you have vast knowledge of it, if u could give smal answer for this
Basically in the above scenario just this i want answer of, Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.
My answer for first part is : that interest parity the theory says that the currency rate changes in different countries so that the interest rates becomes equal so that one would get no benefit from transferring his money from one country to another so acording to interest parity theory after 1 year the exchange rate would be such that the interest rate become equall so therefore it should remain unchanged,
But whats the answer of second part ? Which alternative will generate the highest expected amount of dollars? If multiple alternatives are tied for generating the highest expected amount of dollars, list each of them.
Interest rate parity does not say that exchange rates will change such that the interest rates become equal!!
Different interest rates are one of the reasons for exchange rates changing, and it is interest rate parity that determines the forward exchange rates.You cannot expect to us to provide answers to tests that you have been set!!
If you have already sat the test then ask your tutors for an answer.
If you have not yet sat the set then we certainly don’t do your work for you 🙂Again, if you type out your answer then I will tell you whether you are correct or where you have gone wrong.
Everything needed for the question is covered in my lectures – I assume you have watched them?
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