Local Swiss CFO of The Company Assignment

Assignment Task

Please explain all your steps and show all the calculations.

1. A local Swiss company received its first order from the US and expects to ship the equipment in 4 months upon receipt of the payment of $25 million. The current spot exchange rate is USDCHF = 0.92. The CFO of the company went to BCV and got the following rates:

• 4-month forward rate USDCHF = 0.965
• Interest rate in CHF = 1% (annualized)
• Interest rate in USD = 5% (annualized)

As the company operates in Swiss francs, the manager would like to consider hedging the exposure to US dollars. What options does he have? Is the Swiss franc expected to appreciate or depreciate?

Explain clearly. If in 4 months the spot exchange rate is 0.955, what was the best option in hindsight?

2. Maersk, a Norwegian company, is the largest container ship and commercial vessel operator in the world. Because it operates on the global market, it considers the US dollar as its functional currency, not the Norwegian krone. The company has significant payments and fund turnover and is an active trader and participant in FX markets.

Karlson is a currency trader for Maersk and has immediate use of either $35 million (or the Norwegian krone equivalent) for 3 months. He is faced with the following market rates and wonders whether he can make some arbitrage profits in the coming 90 days. Could you help him?

• USDNOK = 9.01
• Forward rate 90 days for USDNOK = 9.15
• 3-month USD interest rate = 4.500% (annualized)
• 3-month NOK interest rate = 4.600% (annualized)