An FI has made a loan commitment in Swiss francs (SFr) of SFr10 million that is likely to be taken down in six months. The current spot rate is $1.10/SFr.

a. Is the FI exposed to the dollar’s depreciating or appreciating relative to the SFr? Why?

b. If the spot rate six months from today is $1.14/SFr, what amount of dollars is needed if the loan is taken down and the FI is unhedged?

c. If the FI decides to hedge using SFr futures, should it buy or sell SFr futures?

d. A six-month SFr futures contract is available for $1.11/SFr. What net amount would be needed to fund the loan at the end of six months if the FI had hedged using the SFr10 million futures contract? Assume that futures prices are equal to spot prices at the time of payment (i.e., at maturity).