Your firm is a Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)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 Swiss importer of bicycles.You have placed an order with an Italian firm for €1,000,000 worth of bicycles.Payment (in euro)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 against the risk of the euro appreciating against the Swiss franc, the firm should go long on euro futures contracts, buying euros at today's rate for future payment. This locks in the cost of euros needed to pay for the bicycles. Conversely, to hedge against the risk of the Swiss franc depreciating, the firm should go short on Swiss franc futures contracts, selling francs at today's rate for future delivery. This strategy ensures the firm can convert euros to more francs in the future if the franc weakens. The specific numbers of contracts (100 for euros and 160 for Swiss francs) are based on the contract sizes and the total amount of the transaction, ensuring full coverage of the exposure.

Your Firm Is a Swiss Importer of Bicycles