Optimal Hedging Strategies for Swiss Exporters Post Franc De-pegging

This report analyzes the Swiss Franc's de-pegging in 2015, triggered by the Swiss Central Bank's devaluation strategy and citizen protests. It examines the impact on Swiss exporters and domestic firms, evaluating various hedging strategies including unhedged, forward contract, money market hedge, and option hedge approaches. The analysis assesses each strategy's profitability and risk under different future spot rate scenarios. Ultimately, the report identifies the option strategy as the most optimal hedge for ABC Co, minimizing potential losses compared to other methods. Desklib offers a wide array of solved assignments and past papers for students.

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Table of Contents
Question 1:.................................................................................................................................2
Discussing the relevant reasons behind the de-pegging of franc, while evaluating the hedging
strategies implemented by the Swiss Exporter and other domestic firms:.................................2
Question 2:.................................................................................................................................3
a.1) Unhedged strategy for the payment of ABC:......................................................................3
a.2) Forward hedge strategy for the payment of ABC:..............................................................3
a.3) Money Market hedge strategy for the payment of ABC:....................................................4
a.4) Option hedge strategy for the payment of ABC:................................................................4
b) Depicting the most optimal hedge for ABC:.........................................................................5
Reference and Bibliography:......................................................................................................7

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Question 1:
Discussing the relevant reasons behind the de-pegging of franc, while evaluating the
hedging strategies implemented by the Swiss Exporter and other domestic firms:
The de-pegging of franc was mainly initiated during 2011, where the Central bank of
Switzerland used an alternative strategy, which allowed them to devalue their currency in
comparisons to USD and GBP. The organizations in Sweetland was mainly affected by the
rising value of Swiss franc in comparison to other currencies, as it directly reduces the
competitiveness of their organization in the international market. The de-pegging was
initiated during the financial year of 2015, which directly resulted from the high devaluation
of Euro and Switzerland currency (Admiralmarkets.com 2018). Furthermore, there were
relevant factors that initiated the de-pegging measures taken by Central Bank of Switzerland
over the period of time.
 Constant protest from the citizens of Sweetland: The constant protest of the citizens was
mainly conducted for the measures taken by the Switzerland Central Bank for devaluating
the Swiss franc. The citizens were concern regain the constant accumulation of Euro
currency within the depository of Central Bank.
 De-valuation of Euro: The second major factor is considered to be the Euro devaluation,
which was indicted after the Brexit announcement. The major aim of the Swiss Central
Bank was to devalue their currency by increasing their exposure in the Euro currency.
The devaluation mainly augmented the future degeneration of Swiss franc and hampered
the current business conditions of the country (Cnbc.com 2015).
The swiss exporters and domestic firms seeing the decline in the Swiss franc would
eventually take-up certain hedging measure for reducing the level of risk from currency

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conversion. The relevant exporters and small firms can take selling position for their current
payments, which are conducted for reducing the risk from currency conversion conduction.
Question 2:
a.1) Unhedged strategy for the payment of ABC:
Strategy
(Unhedged) Value Value Profit/loss Comment
Payment in 1 year
€
50,000,000
Future Spot rate
$
0.800
$
40,000,000
$
(10,000,000)
Hedge is
Unsuccessful
Future Spot rate
$
0.900
$
45,000,000
$
(5,000,000)
Hedge is
Unsuccessful
Future Spot rate
$
1.050
$
52,500,000
$
2,500,000
Hedge is
Successful
Future Spot rate
$
1.130
$
56,500,000
$
6,500,000
Hedge is
Successful
Future Spot rate
$
1.200
$
60,000,000
$
10,000,000
Hedge is
Successful
Future Spot rate
$
1.250
$
62,500,000
$
12,500,000
Hedge is
Successful
Future Spot rate
$
1.300
$
65,000,000
$
15,000,000
Hedge is
Successful
a.2) Forward hedge strategy for the payment of ABC:
Strategy (Forward
Contract) Value Value Profit/loss Comment
Payment in 1 year
€
50,000,000
Forward contract
$
1.130
$
56,500,000
Future Spot rate
$
0.800
$
40,000,000
$
16,500,000
Hedge is
Successful
Future Spot rate
$
0.900
$
45,000,000
$
11,500,000
Hedge is
Successful
Future Spot rate
$
1.050
$
52,500,000
$
4,000,000
Hedge is
Successful
Future Spot rate
$
1.200
$
60,000,000
$
(3,500,000)
Hedge is
Unsuccessful

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Future Spot rate
$
1.250
$
62,500,000
$
(6,000,000)
Hedge is
Unsuccessful
Future Spot rate
$
1.300
$
65,000,000
$
(8,500,000)
Hedge is
Unsuccessful
a.3) Money Market hedge strategy for the payment of ABC:
Strategy (Money market
hedge contract)
Valu
e Value Profit/loss Comment
Payment in 1 year
€
50,000,000
PV of Borrowed money 1.02
$
49,019,608
Payment in spot
$
1.10
$
53,921,569
Pv of Payment received 1.06
$
56,887,255
Future Spot rate
$
0.800
$
40,000,000
$
16,500,000
Hedge is
Successful
Future Spot rate
$
0.900
$
45,000,000
$
11,500,000
Hedge is
Successful
Future Spot rate
$
1.050
$
52,500,000
$
4,000,000
Hedge is
Successful
Future Spot rate
$
1.130
$
56,500,000
$
-
Hedge is
Successful
Future Spot rate
$
1.200
$
60,000,000
$
(3,500,000)
Hedge is
Unsuccessful
Future Spot rate
$
1.250
$
62,500,000
$
(6,000,000)
Hedge is
Unsuccessful
Future Spot rate
$
1.300
$
65,000,000
$
(8,500,000)
Hedge is
Unsuccessful
a.4) Option hedge strategy for the payment of ABC:
Strategy (Option
hedge) Value Value Profit/loss Comment
Payment in 1 year
€
50,000,000
Exercise price
$
1.11
$
55,500,000
Premium
$
0.06
$
3,000,000
Payment received
$
1.05
$
52,500,000

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Future Spot rate
$
0.800
$
37,000,000
$
(15,500,000)
Do not Exercise
options
Future Spot rate
$
0.900
$
42,000,000
$
(10,500,000)
Do not Exercise
options
Future Spot rate
$
1.050
$
49,500,000
$
(3,000,000)
Do not Exercise
options
Future Spot rate
$
1.130
$
53,500,000
$
1,000,000 Exercise options
Future Spot rate
$
1.200
$
57,000,000
$
4,500,000 Exercise options
Future Spot rate
$
1.250
$
59,500,000
$
7,000,000 Exercise options
Future Spot rate
$
1.300
$
62,000,000
$
9,500,000 Exercise options
The above table directly indicates different options, which can be used by the ABC
Co for receiving the relevant payments of 50 million Euro. In addition, the different measure
or scenario of the future prices has been calculated under different circumstances, which can
be used by the investors in detecting the level of payment that will be received by the
organisation in 1-year period. The relevant dollar cash flows are adequately depicted in the
above tables, which help in understanding the values, which the organisation will obtain
under forward contract, option contract, money market hedge and unhedged strategy. The
currency conversion has certain risk attributes, which can be reduced with the
implementation of forward contract, option contract, money market hedge, while allowing the
organization to maximize its currency conversion rate. Caporin et al. (2014) argued that
investors need to be careful with the hedging strategies, as without adequate knowledge and
research the exposure might hamper the investment capital, while increase losses from
investment.
b) Depicting the most optimal hedge for ABC:
From the overall evaluation, it can be detected that the ABC organisation might
eventually use the Option strategy, as it is considered to be the optimal hedge. The option

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strategy is the most viable method, as it does not allow the organisation to incur loss from the
transaction method. The option strategy mainly has only one loss, which comes from the
premium that needs to be paid by the organisation, while any direction of the current value
movement would secure the payment from the transaction (Dong, Kouvelis and Su 2014).
The other options have high loss condition, which is not present with the option strategy, as
the maximum loss is restricted to the premium amount, which is less than the losses incurred
in different hedging strategy. Hence, the option hedge for ABC is the option strategy, which
can substantially reduce the risk from currency conversion.

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Reference and Bibliography:
Admiralmarkets.com. 2018. Price shock: when the Swiss National Bank unpegged the Swiss
franc from the euro. [online] Available at: https://admiralmarkets.com/analytics/traders-
blog/price-shock-when-the-swiss-national-bank-unpegged-the-swiss-franc-from-the-euro
[Accessed 3 Oct. 2018].
Cnbc.com. 2015. Swiss franc soars, stocks tank as euro peg scrapped. [online] CNBC.
Available at: https://www.cnbc.com/2015/01/15/swiss-franc-sours-stocks-tank-as-euro-peg-
scrapped.html [Accessed 3 Oct. 2018].
Breedon, F., Chen, L., Ranaldo, A. and Vause, N., 2016. Judgement Day: Algorithmic
Trading in the Swiss Franc De-pegging.
Caporin, M., Jimenez-Martin, J.A. and Gonzalez-Serrano, L., 2014. Currency hedging
strategies in strategic benchmarks and the global and Euro sovereign financial crises. Journal
of International Financial Markets, Institutions and Money, 31, pp.159-177.
Cielinska, O., Joseph, A., Shreyas, U., Tanner, J. and Vasios, M., 2017. Gauging market
dynamics using trade repository data: the case of the Swiss franc de-pegging.
Currencyfair,com. 2015. What Happened To The Swiss CHF? | CurrencyFair. [online]
Available at: https://www.currencyfair.com/blog/what-happened-to-the-swiss-franc-chf-
today/ [Accessed 3 Oct. 2018].
Dong, L., Kouvelis, P. and Su, P., 2014. Operational hedging strategies and competitive
exposure to exchange rates. International Journal of Production Economics, 153, pp.215-
229.

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Mensi, W., Hammoudeh, S. and Yoon, S.M., 2015. Structural breaks, dynamic correlations,
asymmetric volatility transmission, and hedging strategies for petroleum prices and USD
exchange rate. Energy Economics, 48, pp.46-60.