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 one-year SF futures contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125 000.
a. Should the FI be worried about the SF appreciating or depreciating?
b. Should it buy or sell futures to hedge against exchange rate exposure?
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c. How many futures contracts should it buy or sell if a regression of past spot prices on future prices generates an estimated slope of 1.4?
d. Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year-end, the spot price of SF at year-end is $0.55/SF and the forward price is $0.5443/SF.