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What is the optimal number of euros to be delivered

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Question - 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 0.858334. What is the optimal number of euros to be delivered in the short forward contract according to the minimum variance hedge ratio?

a. 4.95 million euros

b. 5.00 million euros

c. 5.10 million euros

d. 5.05 million euros

e. 5.15 million euros

Reference no: EM132892303

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