Construct a hedge and evaluate how your investment will do

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Reference no: EM131323537

You plan to buy 1,000 shares of Swiss International Airlines stock. The current price is SF950. The current exchange rate is $0.7254/SF. You are interested in speculating on the stock but do not wish to assume any currency risk.

You plan to hold the position for six months. The appropriate futures contract currently is trading at $0.7250. Construct a hedge and evaluate how your investment will do if in six months the stock is at SF926.50, the spot exchange rate is $0.7301, and the futures price is $0.7295.

The Swiss franc futures contract size is SF125,000. Determine the overall profit from the transaction. Then break down the profit into the amount earned solely from the performance of the stock, the loss or gain from the currency change while holding the stock, and the loss or gain on the futures transaction.

Reference no: EM131323537

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