Your firm is an Italian importer of bicycles.You have placed an order with a Swiss firm for SFr.2,000,000 worth of bicycles.Payment (in 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.

Question

Quizplus · Accepted Answer

The best choice to hedge the exchange rate risk of the order with a Swiss firm for SFr. 2,000,000 worth of bicycles is to go long 200 12-month Swiss franc futures contracts and short 125 12-month euro futures contracts. This means that the company will buy 200 futures contracts of Swiss francs, which will protect them against the appreciation of the Swiss franc, and at the same time, they will sell 125 euro futures contracts, which will enable them to benefit from the depreciation of the euro. This strategy will help in reducing the exchange rate risk and stabilize the cash flows.

Your Firm Is an Italian Importer of Bicycles