The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:
$$\begin{array} { l c c }
& \text { U.S. } & \text { Switzerland } \
\text { 360-day borrowing rate } & 7 \% & 5 \% \
\text { 360-day deposit rate } & 6 \% & 4 \%
\end{array}$$
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:
A) $101,904.
B) $101,923.
C) $98,770.
D) $96,914.
E) $92,307.

Question

The forward rate of the Swiss franc is $.50. The spot rate of the Swiss franc is $.48. The following interest rates exist:
$$\begin{array} { l c c } 
& \text { U.S. } & \text { Switzerland } \
\text { 360-day borrowing rate } & 7 \% & 5 \% \
\text { 360-day deposit rate } & 6 \% & 4 \%
\end{array}$$
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:
A) $101,904.
B) $101,923.
C) $98,770.
D) $96,914.
E) $92,307.

Quizplus · Accepted Answer

To use a money market hedge, you would borrow the present value of SF200,000 at the Swiss deposit rate (4%) and convert it to dollars at the spot rate. The present value of SF200,000 is SF200,000 / (1 + 0.04) = SF192,307.69. Converting this to dollars at the spot rate of $0.48 gives $92,307.69. Borrowing this amount in the U.S. at 7% for 360 days results in $92,307.69 * (1 + 0.07) = $98,770.23.

The Forward Rate of the Swiss Franc Is You Need to Purchase SF200,000 in 360 Days