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Explanation:
Correct answer: A) Their risk is Swiss Franc (CHF) depreciation; the hedge is an FX forward to buy $1.0 million dollars in exchange for 902,300 Swiss Francs
Swissmaker must pay USD 1,000,000 in two years. Since its functional currency is CHF, it is exposed to the risk that CHF depreciates against USD. If CHF weakens, it will take more CHF to buy the same amount of USD.
To hedge this exposure, Swissmaker should enter an FX forward to buy USD and sell CHF in two years.
Using the two-year ask rate for USDCHF:
So Swissmaker would lock in the ability to buy $1.0 million for 902,300 CHF.
Why the other choices are wrong:
Therefore, the correct answer is A.
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Question 21.8.3
Swissmaker Corporation is a 3D printer manufacturer who operates in Switzerland and recently entered into a contract with a key vendor in the United States. The vendor will deliver semi-finished components in two (2) years. At that time (T0 + 2.0 years), Swissmaker will need to deliver as payment $1.0 million (USD) dollars. The table below displays the current spot and forward exchange rate quotes for the USDCHF currency pair, aka, the Swissie. Per forex convention, USD is the base currency, and CHF is the quote currency.
USDCHF Quotes
| Expiration | Bid | Ask |
|---|---|---|
| Overnight | 0.9198 | 0.9200 |
| One Month | 0.9190 | 0.9193 |
| Three Months | 0.9171 | 0.9175 |
| Six Months | 0.9150 | 0.9153 |
| One Year | 0.9096 | 0.9101 |
| Two Years | 0.8951 | 0.9023 |
| Three Years | 0.8784 | 0.8796 |
| Four Years | 0.8621 | 0.8638 |
| Five Years | 0.8460 | 0.8482 |
Swissmaker seeks to hedge the currency risk attached to the vendor's contract. What is their currency risk, and what is the appropriate hedge trade for Swissmaker Corporation?
A
Their risk is Swiss Franc (CHF) depreciation; the hedge is an FX forward to buy $1.0 million dollars in exchange for 902,300 Swiss Francs
B
Their risk is Swiss Franc (CHF) depreciation; the hedge is an FX forward to buy $1.0 million dollars in exchange for 1,108,279 Swiss Francs
C
Their risk is Swiss Franc (CHF) appreciation; the hedge is an FX forward to sell $1.0 million dollars in exchange for 1,117,194 Swiss Francs
D
Their risk is Swiss Franc (CHF) appreciation; the hedge is an FX forward to sell $1.0 million dollars in exchange for 895,100 Swiss Francs