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.
A)Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures contracts.
B)Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts.
C)Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures contracts.
D)Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures contracts.
E)None of the above

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. 
A)Go short 100 12-month euro futures contracts; and short 160 12-month SFr. futures contracts. 
B)Go long 100 12-month € futures contracts; and long 160 12-month SFr. futures contracts. 
C)Go long 100 12-month euro futures contracts; and short 160 12-month Swiss Franc futures contracts. 
D)Go short 100 12-month euro futures contracts; and long 160 12-month Swiss Franc futures contracts. 
E)None of the above

Quizplus · Accepted Answer

To hedge the exchange rate risk, the firm should go long on the 12-month euro futures contracts and short on the 12-month Swiss Franc futures contracts. This will protect the firm from any potential strengthening of the Swiss Franc against the Euro, which would increase the amount owed in Swiss Franc terms. However, going short on the Euro futures contracts alone or going long on both Euro and Swiss Franc futures contracts may expose the firm to additional risks or lead to ineffective hedges.

Your Firm Is a Swiss Importer of Bicycles