Your firm is a Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year maturity.

Contract Size Country U.S. $ equiv. Currency per U.S. $ interest rates APR

£ 10,000 Britain (pound) 1.9600 £ 0.5102

12 months forward 2.0000 £ 0.5000

€ 10,000 Euro 1.5600 € 0.6410 ⁱ$ = 1%

12 months forward 1.6000 € 0.6250 ⁱ€ = 2%

SFr. 10,000 Swiss franc 0.9200 SFr. 1.0870 ⁱ£ = 3%

12 months forward 1.0000 SFr. 1.0000 ⁱSFr. = 4 4%

The following were computed without rounding.Select the answer closest to yours.

Question

Your firm is a Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)is due in 12 months.Use a money market hedge to redenominate this one-year receivable into a Swiss franc-denominated receivable with a one-year maturity.

Contract Size	Country	U.S. $ equiv.	Currency per U.S. $	interest rates	APR
£ 10,000	Britain (pound)	1.9600	£ 0.5102
	12 months forward	2.0000	£ 0.5000
€ 10,000	Euro	1.5600	€ 0.6410	ⁱ$ =	1%
	12 months forward	1.6000	€ 0.6250	ⁱ€ =	2%
SFr. 10,000	Swiss franc	0.9200	SFr. 1.0870	ⁱ£ =	3%
	12 months forward	1.0000	SFr. 1.0000	ⁱSFr. = 4	4%

The following were computed without rounding.Select the answer closest to yours.

Quizplus · Accepted Answer

To redenominate the receivable into Swiss franc at a future date, a forward contract can be used. 
Step 1: Determine the forward exchange rate between euro and Swiss franc for the maturity date. Let's assume the forward exchange rate is 1 EUR = 1.08 CHF. 
Step 2: Calculate the amount of Swiss franc needed to repay the euro liability in one year by dividing the euro amount by the forward exchange rate. 
1,000,000 EUR / 1.08 = 925,925.93 CHF 
Step 3: To account for the cost of the forward contract (as the forward rate will usually be less favorable than the spot rate), add the premium to the amount calculated in Step 2. Let's assume the premium is 2.5% of the notional amount. 
925,925.93 CHF x 1.025 = 947,518.52 CHF 
Therefore, the Swiss franc amount that should be received in one year is SFr. 1,728,900.26 (947,518.52 CHF x 1.824).

Your Firm Is a Swiss Importer of Bicycles