Long-Term Hedging
Response to the following problem:
San Fran Co. imports products. It will pay 5 million Swiss francs for imports in 1 year. Mateo Co. will also pay 5 million Swiss francs for imports in 1 year. San Fran Co. and Mateo Co. will also need to pay 5 million Swiss francs for imports arriving in 2 years. Today, Mateo Co. uses a 1-year forward contract to hedge its payables in 1 year. A year from today, it will use a 1-year forward contract to hedge the payables that it must pay 2 years from today. Today, San Fran Co. uses a 1-year forward contract to hedge its payables due in 1 year. Today, it also uses a 2-year forward contract to hedge its payables in 2 years. Interest rate parity exists and it will continue to exist in the future. The Swiss franc will consistently depreciate over the next 2 years. Switzerland and the United States have similar interest rates, regardless of their maturity, and those rates will continue to be the same in the future. Will the total expected dollar cash outflows that San Fran Co. will pay for its payables be higher than, lower than, or the same as the total expected dollar cash outflows that Mateo Co. will pay? Explain.