money market versus put option hedge narto co a u s firm exports to switzerland and 1555554

Money Market versus Put Option Hedge Narto Co. (a U.S. firm) exports to Switzerland and expects to receive 500,000 Swiss francs in 1 year. The 1-year U.S. interest rate is 5 percent when investing funds and 7 percent when borrowing funds. The 1-year Swiss interest rate is 9 percent when investing funds and 11 percent when borrowing funds. The spot rate of the Swiss franc is $.80. Narto expects that the spot rate of

the Swiss franc will be $.75 in 1 year. There is a put option available on Swiss francs with an exercise price of $.79 and a premium of $.02.

 a. Determine the amount of dollars that Narto Co. will receive at the end of 1 year if it implements a money market hedge.

 b. Determine the amount of dollars that Narto Co. expects to receive at the end of 1 year (after accounting for the option premium) if it implements a put option hedge