A U.S. FI has assets denominated in Swiss francs (SFr) of 75 million and liabilities of 125

Question:

A U.S. FI has assets denominated in Swiss francs (SFr) of 75 million and liabilities of 125 million. The spot rate is $1.0600/SFr and one-year futures are available for $1.0512/SFr.

a. What is the FI’s net exposure?

b. Is the FI exposed to dollar appreciation or depreciation relative to the SFr?

c. If the SFr spot rate changes from $1.0600/SFr to $1.0830/SFr, how will this impact the FI’s currency exposure? Assume no hedging.

d. What is the number of futures contracts necessary to fully hedge the currency risk exposure of the FI? The contract size is SFr125,000 per contract.

e. If the SFr futures exchange rate falls from $1.0512/SFr to $1.0282/SFr, what will be the impact on the FI’s futures position?

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