Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated payable 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. A)SFr.2,000,000 B)SFr.2,151,118.62 C)SFr.2,068,383.28 D)SFr.1,921,941.75

Question

Your firm is a Swiss importer of bicycles.You have placed an order with a British firm for £1,000,000 worth of bicycles.Payment (in pounds sterling)is due in 12 months.Use a money market hedge to redenominate this one-year pound denominated payable into a Swiss franc-denominated payable 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. A)SFr.2,000,000 B)SFr.2,151,118.62 C)SFr.2,068,383.28 D)SFr.1,921,941.75

Quizplus · Accepted Answer

To redenominate the payable, we need to buy a forward contract for the amount of £1,000,000 in one year's time. We need to calculate the present value of this contract in Swiss francs. 
Assuming the current exchange rate is SFr/£ = 2,000,000/£, the present value of the forward contract in Swiss francs would be: 
SFr = £1,000,000 x (SFr/£) / (1 + r) 
where r is the risk-free interest rate in Switzerland. 
Assuming the risk-free interest rate in Switzerland is 0.5%, we get:

SFr = £1,000,000 x (SFr/£) / (1 + r) 
= £1,000,000 x (2,000,000/£) / (1 + 0.005) 
= SFr. 2,151,118.62

Therefore, the best choice is B, SFr.2,151,118.62.

Your Firm Is a Swiss Importer of Bicycles