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Comparing Multiple Hedging Methods ? The US based...




Comparing Multiple Hedging Methods ? The US based MNC Kline has payables of CHF 40,000 in six months. The firm?s economist forecasts that the CHF/USD could end the period with a value of either 0.55 (probability of 60%) or 0.65 (probability of 40%). The firm is concerned about its currency risk. It has also assessed some hedging alternatives. Six-month CHF/USD forward contracts are traded at 0.60. The six-month interest rates (annual compounding) in the US and Switzerland are 5% and 4% respectively. Call options with six-month expiration and a strike price of USD 0.60 are available for a premium of USD 0.01. Your job is to advise the firm about the alternatives available and the best approach. Assume the pot rate is USD 0.62.


Paper#1093 | Written in 18-Jul-2015

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