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Complete the following problem set in its entirety. You will need to use the Foreign Exchange Crib Sheet to complete this problem set.
If the spot rate for the Swiss Franc (SF) is that 1.15 SF is equal to 1 $U.S., and the annual interest rate on fixed rate one-year deposits of SF is 1.5% and for $U.S. is 2.5%, what is nine-month forward rate for one dollar in terms of SFs? Assuming the same interest rates, what is the 18-month forward rate for one SF in U.S. dollars? Is this an indirect or a direct rate? If the forward rate is an accurate predictor of exchange rates, in this case will the SF get stronger or weaker against the dollar? What does this indicate about the market’s inflation expectations for Switzerland as compared to the United States?
On January 5th, 2015, Nestle expects to ship 1,000,000 boxes of Nestle Crunch Chocolate from its Swiss plant to the United States that it will sell through retail outlets on 270-day terms at $150 per box. So Nestle will receive payment from these U.S. outlets on October 1, 2015. Assuming Nestle needs to cover its expenses in Switzerland and thus wants to hedge its SF/$U.S. exposure using a forward contract with a Swiss bank, what is the minimum amount of Swiss Francs they should receive on October 1, 2015 given the 9-month forward rate for one U.S. dollar in terms of Swiss Francs you calculated in problem one? What are two other ways Nestle might hedge its SF/$U.S. exposure?
Question 3 contains all of the following parts:
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