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12 Month $-CHF Forecast

15th November, 2000   Spot: 1.7700

The Yen Connection

YEN-CHF Swissy - no strength of its own
The Swiss Franc (or the Euro) does not seem to have any strength of its own against the Dollar.

1995-97…weakens alongwith Yen
1997-98…steady while Yen weakens further
1998-99…strengthens alongwith Yen
1999-00…weak while Yen strengthens

The Swiss Franc will not strengthen unless the Yen strengthens against the Dollar. And in case the Yen weakens against the Dollar, the Swiss Franc may just remain largely steady.

The question may therefore turn out to be, "Will the Yen strengthen against the Dollar?" The answer in the Short term (3 months) is UNLIKELY. Neither the Japanese, nor the Americans are interested in seeing the Dollar weaken against the Yen.

Trajectory Tree

Tragectory Tree


While a drop to 1.73-1.70 and 1.67 is a possibility, it is not a foregone conclusion. There is a chance that the Dollar may strengthen towards 1.80-1.83-1.85 before falling to 1.73. And even then, a further fall to 1.67 and 1.65 can once again produce an upmove to 1.85.


Suggested Strategy

For a Swiss Franc Borrower, the strategy should be to
  • Protect against any immediate downturn/ correction in the Dollar

  • Review the market near a potential high of 1.83-1.85 and capture that level if necessary
  • At all times allow the market to deliver benefit to the Swiss Franc loan if the market wishes to weaken the Swiss Franc further


    Suggested Tool

    The Hedging Tool best suited for this strategy is a plain vanilla Dollar Put - Swiss Call Option.

    An Option is eminently preferable to a Forward Contract because it is the only real foil against Volatility and which gives the borrower the ability to keep the door open for further benefits.

    A plain vanilla Dollar Put - Swiss Call Option is suggested because the possibility of the Dollar accelerating from 1.85 to 2.0 cannot be ruled out. In light of this structuring a Zero-Cost option may also cut out the benefit of a possible move to 1.85

    In case the cost of an Option - in the region of 3% - appears to be expensive, this Option Cost can be kept as a Stop Loss Budget and Forward Contracts can be used for hedging with a maximum Stop Loss within this budget.


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