Chapter 5 Exercise 13,14 - A US-based corporation has decided

Question # 00845749 Posted By: wildcraft Updated on: 09/13/2023 09:25 PM Due on: 09/14/2023
Subject Economics Topic General Economics Tutorials:
Question

Chapter 5

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

Instructions

1. Use your textbook to answer the following questions from Chapter 5:
1. Exercise 13 and 14.
3. Please, use the full computing power of Excel.

Questions

13.   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:

• 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.

• 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.

(a) Which currency should the company use for hedging purposes?

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

14.  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 + ?

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

Tutorials for this Question
1. Solution: Chapter 5 Exercise 13,14 - A US-based corporation has decided

Tutorial # 00841217 Posted By: wildcraft Posted on: 09/13/2023 09:26 PM
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