Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

U.S. $ equiv. Currency per U.S. $

Contract Size Country Tuesday Monday Tuesday Monday

£ 10,000 Britain (pound) $ 1.9600 $ 1.9400 £ 0.5102 £ 0.5155

1 months forward $ 1.9700 $ 1.9500 £ 0.5076 £ 0.5128

3 months forward $ 1.9800 $ 1.9600 £ 0.5051 £ 0.5102

6 months forward $ 1.9900 $ 1.9700 £ 0.5025 £ 0.5076

12 months forward $ 2.0000 $ 1.9800 £ 0.5000 £ 0.5051

€ 10,000 Euro $ 1.5600 $ 1.5400 € 0.6410 € 0.6494

1 months forward $ 1.5700 $ 1.5500 € 0.6369 € 0.6452

3 months forward $ 1.5800 $ 1.5600 € 0.6329 € 0.6410

6 months forward $ 1.5900 $ 1.5700 € 0.6289 € 0.6369

12 months forward $ 1.6000 $ 1.5800 € 0.6250 € 0.6329

SFr. 10,000 Swiss franc $ 0.9200 $ 0.9000 SFr. 1.0870 SFr. 1.1111

1 months forward $ 0.9400 $ 0.9200 SFr. 1.0638 SFr. 1.0870

3 months forward $ 0.9600 $ 0.9400 SFr. 1.0417 SFr. 1.0638

6 months forward $ 0.9800 $ 0.9600 SFr. 1.0204 SFr. 1.0417

12 months forward $ 1.0000 $ 0.9800 SFr. 1.0000 SFr. 1.0204

Question

Your firm is a U.K.-based importer of bicycles.You have placed an order with a Swiss firm for SFr.1,000,000 worth of bicycles.Payment (in Swiss francs)is due in 12 months.Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type and maturity.

		U.S. $ equiv.		Currency per U.S. $
Contract Size	Country	Tuesday	Monday	Tuesday	Monday
£ 10,000	Britain (pound)	$ 1.9600	$ 1.9400	£ 0.5102	£ 0.5155
	1 months forward	$ 1.9700	$ 1.9500	£ 0.5076	£ 0.5128
	3 months forward	$ 1.9800	$ 1.9600	£ 0.5051	£ 0.5102
	6 months forward	$ 1.9900	$ 1.9700	£ 0.5025	£ 0.5076
	12 months forward	$ 2.0000	$ 1.9800	£ 0.5000	£ 0.5051
€ 10,000	Euro	$ 1.5600	$ 1.5400	€ 0.6410	€ 0.6494
	1 months forward	$ 1.5700	$ 1.5500	€ 0.6369	€ 0.6452
	3 months forward	$ 1.5800	$ 1.5600	€ 0.6329	€ 0.6410
	6 months forward	$ 1.5900	$ 1.5700	€ 0.6289	€ 0.6369
	12 months forward	$ 1.6000	$ 1.5800	€ 0.6250	€ 0.6329
SFr. 10,000	Swiss franc	$ 0.9200	$ 0.9000	SFr. 1.0870	SFr. 1.1111
	1 months forward	$ 0.9400	$ 0.9200	SFr. 1.0638	SFr. 1.0870
	3 months forward	$ 0.9600	$ 0.9400	SFr. 1.0417	SFr. 1.0638
	6 months forward	$ 0.9800	$ 0.9600	SFr. 1.0204	SFr. 1.0417
	12 months forward	$ 1.0000	$ 0.9800	SFr. 1.0000	SFr. 1.0204

Quizplus · Accepted Answer

To hedge the exchange rate risk, the importer should go long on the Swiss franc futures contracts as they are the base currency in the transaction. This will protect the importer from the potential depreciation of the Swiss franc. Simultaneously, the importer should go short on the pound futures contracts as they are the currency in which the importer will eventually pay for the goods. By going short on the pound futures contracts, the importer will protect itself from the potential appreciation of the pound. To determine the number of contracts required, the importer needs to calculate the notional value of the contracts. Assuming that the current Swiss franc futures price is 1.1500, the importer would require 86957.66 (1,000,000/1.1500) Swiss franc futures contracts. As futures contracts are not traded in decimals, the importer would purchase 87000 Swiss franc futures contracts. Similarly, assuming that the current pound futures price is 1.3000, the importer would require 38461.54 (500,000/1.3000) pound futures contracts. As futures contracts are not traded in decimals, the importer would sell 38500 pound futures contracts. The importer should ensure that the contracts have the same maturity date, in this case, 12 months.

Your Firm Is a U