Omni Advisors, an international pension fund manager, plans to sell equities de- nominated in Swiss francs (CHF) and purchase an equivalent amount of equities denominated in South African rands (ZAR).
Omni will realize net proceeds of 3 million CHF at the end of 30 days and wants to eliminate the risk that the ZAR will appreciate relative to the CHF during this 30-day period. The following exhibit shows current exchange rates between the ZAR, CHF, and the U.S. dollar (USD).
Currency Exchange Rates
ZAR/USD CHF/USD
|
Maturity
|
Bid
|
Ask
|
Bid
|
Ask
|
|
Spot
|
6.2681
|
6.2789
|
1.5282
|
1.5343
|
|
30-day
|
6.2538
|
6.2641
|
1.5226
|
1.5285
|
|
90-day
|
6.2104
|
6.2200
|
1.5058
|
1.5115
|
a. Describe the currency transaction that Omni should undertake to eliminate currency risk over the 30-day period.
b. Calculate the following:
- The CHF/ZAR cross currency rate Omni would use in valuing the Swiss equity portfolio.
- The current value of Omni's Swiss equity portfolio in ZAR.
- The annualized forward premium or discount at which the ZAR is trading versus the CHF.