An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000. Should the FI be worried about the SF appreciating or depreciating?Should it buy or sell futures to hedge against exchange rate risk exposure?How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4?Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.

Future contract Future contract are traded on exchange. Under the contract the purchaser of future…

Answered: An FI is planning to hedge its…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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An FI is planning to hedge its one-year, 100 million Swiss franc (SF)-denominated loan against exchange rate risk. The current spot rate is $0.60/SF. A 1-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000.

Should the FI be worried about the SF appreciating or depreciating?
Should it buy or sell futures to hedge against exchange rate risk exposure?
How many futures contracts should it buy or sell if a regression of past spot exchange rates on changes in future exchange rates generates an estimated slope of 1.4?
Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot exchange rate of SF at year-end is $0.55/SF, and the forward exchange rate is $0.5443/SF.

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