Which currency should the company use for hedging purposes

Assignment Help Microeconomics

Reference no: EM133516078

Homework: Individual Position

In this homework, you will solve problems on hedging with futures and forwards.

Task

I. A US-based corporation has decided to make an investment in Sweden, for which it will require a sum of 100 million Swedish kronor (SEK) in three-months' time. The company wishes to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF) and has made the following estimates:

1. If EUR forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/EUR forward rate is 0.018, and the correlation between the changes is 0.90.
2. If CHF forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/CHF forward rate is 0.023, and the correlation between the changes is 0.85.

Finally, the current USD/SEK spot rate is 0.104, the current three-month USD/EUR forward rate is 0.471, and the current three-month USD/CHF forward rate is 0.602.

1. Which currency should the company use for hedging purposes?

2. What is the minimum-variance hedge position? Indicate if this is to be a long or short position.

II. You use silver wire in manufacturing. You are looking to buy 100,000 oz of silver in three months' time and need to hedge silver price changes over these three months.

One COMEX silver futures contract is for 5,000 oz. You run a regression of daily silver spot price changes on silver futures price changes and find that δs = 0.03 + 0.89δF +

1. What should be the size (number of contracts) of your optimal futures position? Should this be long or short?

Reference no: EM133516078

Questions Cloud

Difference between the for and for each loop : Develop a Message Printing Program Using For and While Loop - Difference Between the For and For Each Loop

Best represent contemporary culture : Which three of these composers do you believe best represent contemporary culture? Why?

What is the arbitrage-free forward price of gold : If the spot price of gold is $360/oz and the three-month interest rate is 4%, what is the arbitrage-free forward price of gold?

Door Dash and Uber Eats : Many food delivery companies (Door Dash and Uber Eats) charge restaurants a 30% commission to deliver their food to customers' homes.

Which currency should the company use for hedging purposes : Which currency should the company use for hedging purposes? What is the minimum-variance hedge position? Indicate if this is to be a long or short position.

Objectively assess ethical choices is essential skill : The ability to objectively assess ethical choices is an essential skill, and the ability to see things from differing perspectives is of utmost importance.

The gender revolution : Tell me about the article, the gender revolution: uneven and stalled by england. schafer textbook chapter 9.

What is the purpose of the reporting discuss in the concept : What is the title of GAAP Concept No. 5? What is the purpose of the reporting discussed in this concept? When was this concept last modified?

Analyze industry based on internal rivalry within industry : Analyze the industry based on the Internal Rivalry within the industry. The choice of industry must be approved by the instructor.

User Account

All Pages