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.
A)Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
B)Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
C)Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts.
D)Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts.
E)None of the above

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. 
A)Go short 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts. 
B)Go long 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts. 
C)Go short 100 12-month Swiss franc futures contracts; and short 50 12-month pound futures contracts. 
D)Go long 100 12-month Swiss franc futures contracts; and long 50 12-month pound futures contracts. 
E)None of the above

Quizplus · Accepted Answer

The best strategy would be to go long 100 12-month Swiss franc futures contracts and short 50 12-month pound futures contracts as this will create an offsetting effect between the currency risk and the futures positions. By going long on the Swiss franc futures contracts, the firm can lock in the Swiss franc exchange rate, while going short on the pound futures contracts allows them to hedge their exposure to any potential appreciation of the pound. The ratio of 2:1 (short 50: long 100) is based on the relative volatility of the two currencies.

Your Firm Is a U