Madison Inc. imports olive oil from Chilean firms, and the invoices are always denominated in pesos (Ch$).

Question:

Madison Inc. imports olive oil from Chilean firms, and the invoices are always denominated in pesos (Ch$). It currently has a payable in the amount of Ch$250 million that it would like to hedge. Unfortunately, there are no peso futures contracts available and Madison is having difficulty arranging a peso forward contract. Its treasurer, who recently received his MBA, suggests using the Brazilian real (R) to cross-hedge the peso exposure. He recently ran the following regression of the change in the for the peso against the change in the real = 1.6(ΔR/US$)
a. There is an active market in the forward real. To crosshedge Madison’s peso exposure, should the treasurer buy or sell the real forward?
b. What is the risk-minimizing amount of reals that the treasurer would have to buy or sell forward to hedge Madison’s peso exposure?

Exchange Rate
The value of one currency for the purpose of conversion to another. Exchange Rate means on any day, for purposes of determining the Dollar Equivalent of any currency other than Dollars, the rate at which such currency may be exchanged into Dollars...