Your firm is an Italian exporter of bicycles.You have sold an order to a Swiss firm for SFr.2,000,000 worth of bicycles.Payment from the customer (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 | |
A) Go long 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
B) Go short 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
C) Go long 200 12-month Swiss franc futures contracts; and short 125 12-month euro futures contracts.
D) Go short 200 12-month Swiss franc futures contracts; and long 125 12-month euro futures contracts.
E) none of the options
Correct Answer:
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