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What is the optimal number of euros to be delivered

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A US exporter will receive 30 million Norwegian kroner (NOK) in 3 months and wishes to hedge the US dollar (USD)-NOK exchange rate. Assume that there is no active forward market in NOK. Therefore, the company decides to hedge using a forward contract on a foreign currency whose price changes are highly correlated with those of NOK. It decides to use a forward contract on the euro (EUR).

The standard deviation of quarterly changes in the USD/NOK exchange rate is 0.005. The standard deviation of quarterly changes in the USD/EUR forward rate is 0.025. The correlation between the quarterly changes in the USD/NOK exchange rate and the quarterly changes in the USD/EUR forward rate is 0.85. What is the optimal number of euros to be delivered in the short forward contract according to the minimum variance hedge ratio?

Reference no: EM132686939

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