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On June 17 of a particular year, an American watch dealer decided to import 100,000 Swiss watches. Each watch costs SF205. The dealer would like to hedge against a change in the dollar/Swiss franc exchange rate. The futures rate was $0.3881. The sport rate of Swiss Franc is $0.3830.
a. Should the dealer choose a long hedge or a short hedge? Explain his spot market position and his futures market position.
b. What is the initial basis? What is the end basis if the dealer holds the position to expiration?
c. Determine the outcome from the hedge if it was closed on August 16, when the spot rate was $0.4434.
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