An FI has made a loan commitment of SFr10 million that is likely to be taken down in six months. The current spot exchange rate is $1.0210/SFr.

a. Is the FI exposed to the dollar depreciating or the dollar appreciating?

Why?

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

c. If the spot rate six months from today is $1.0610/SFr, what dollar amount is needed in six months if the loan is drawn?

d. A six-month SFr futures contract is available for $1.0310/SFr. What is the net amount needed at the end of six months if the FI has hedged using the SFr10 million of futures contracts? Assume that futures prices are equal to spot prices at the time of payment, that is, at maturity.

e. If the FI decides to use options to hedge, should it purchase call or put options?

f. Call and put options with an exercise price of $1.0310/SFr are selling for

$0.02 and $0.03 per SFr, respectively. What would be the net amount needed by the FI at the end of six months if it had used options instead of futures to hedge this exposure?