Problem: A U.S. corporation, Forever Young, Inc., intends to import $1,000,000 worth of cosmetics from Switzerland and will make payment in SF three months from now.The foreign exchange spot rate of Swiss franc to the U.S. dollar is SF6/$. Annual interest rates for U.S. dollar and Swiss franc are 5 percent and 8 percent, respectively.
a. What is the three-month forward rate for French franc if interest-rate parity holds?
b. How can Forever Young, Inc., use currency trading to hedge against the foreign exchange risk associated with the purchase?