Question

"The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:

360-day borrowing rate
US: 7%
Switzerland 5%
360-day deposit rate
US: 6%
Switzerland: 4%

You need to purchase SF200,000 in 360 days. If you use a money market hedge, the amount of dollars you need in 360 days is ___.

Answer 1

Step-by-step explanation:

1. Borrow SF 200,000 at a rate 5%, (SF200,000/1.05) = SF 190,476.

2. Convert SF 190,476 to USD at a spot $0.48

SF190,476 x $0.48 = $91,428

3. Invest $91,428 at 6% = $91,428 x1.06 = $96,914