Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling) 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 pound futures contracts; and long 200 12-month SFr. futures contracts.
B)Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts.
C)Go short 100 12-month pound futures contracts.
D)Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts.
E)None of the above

Question

Your firm is a Swiss importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling) 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 pound futures contracts; and long 200 12-month SFr. futures contracts. 
B)Go long 100 12-month pound futures contracts; and short 200 12-month SFr. futures contracts. 
C)Go short 100 12-month pound futures contracts. 
D)Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts. 
E)None of the above

Quizplus · Accepted Answer

To hedge against the exchange rate risk, the importer should go long on pound futures contracts and short on Swiss Franc futures contracts. This will lock in the exchange rate for the future and protect the importer against any fluctuations. The number of contracts required will depend on the size of the order and the exchange rate at the time of hedging, but the ratio should be 1:2 for the pound and the Swiss Franc contracts. Therefore, the best choice is to go long on 100 12-month pound futures contracts and short on 200 12-month Swiss Franc futures contracts.

Your Firm Is a Swiss Importer of Bicycles