(Transaction Exposure to Currency Risk) You plan to visit Geneva, Switzerland

(Transaction Exposure to Currency Risk) You plan to visit Geneva, Switzerland, in three months to attend an International Student Conference. You expect to incur a total cost of CHF 5,000 for lodging, meals, and transportation during your stay. As of today, the spot exchange rate is USD 0.60 / CHF and the three-month forward rate is USD 0.63 / CHF. You can buy a three-month call option on CHF with an exercise price of USD 0.64 / CHF for the premium of USD 0.05 / CHF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per year in USD and 4 percent per year in CHF.

a. Calculate your expected dollar cost of buying CHF 5,000 if you choose to hedge by a call option on CHF.
b. Calculate the future dollar cost of meeting this CHF obligation if you decide to hedge using a forward contract.
c. At what future spot exchange rate will you be indifferent between the forward and the option market hedges?

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