Your firm is a swiss exporter of bicycles you have

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32) Your firm is a Swiss exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the British firm (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. 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 month 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 month 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 month 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 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; and short 200 12-month SFr. futures contracts. D) Go long 100 12-month pound futures contracts; and long 200 12-month SFr. futures contracts. E) none of the options
Answer: A Explanation: 100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X : ($2,000,000 / X ) = ($1 / SFr. 1), where X = SFr. 2,000,000. Next, SFr. 2,000,000/ SFr. 10,000 = 200 contracts. Topic: Forward Market Hedge
33) 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. 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 month 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 month 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 month 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 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 options
Answer: B Explanation: 100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X : ($2,000,000 / X ) = ($1 / SFr. 1), where X = SFr. 2,000,000. Next, SFr. 2,000,000/ SFr. 10,000 = 200 contracts. Topic: Forward Market Hedge

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