A US-based corporation has decided to make an investment in Sweden, for which it will require a

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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.

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a Since the correlation of changes in the spot USDS...View the full answer

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Question Posted: Jan 10, 2024 01:00 AM

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A US-based corporation has decided to make an investment in Sweden, for which it will require a

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a Since the correlation of changes in the spot USDS...View the full answer

Derivatives Principles And Practice

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