A trader for Prometheus Partners—a macro hedge fund—is debating how to structure his bet that the euro-zone will break up in the next six to nine months, resulting in a massive capital flight into refuge currencies such as the Swiss franc. On October 17, 2013, March 2014 futures on the euro and the Swiss franc are available at US$1.3605/€ and US$1.1617/CHF.

a. Show how Prometheus Partners’ trader can structure his speculative bet.

b. Suppose that on January 17, 2014, Greece exits the euro. March 2014 futures on the euro plunge to $1.2417/€ while the CHF jumps to US$1.2777/CHF. Should our trader close his positions? Show profit/loss, taking into account that Prometheus Partners is required to maintain a 10 percent margin of contracts’ face value and that its opportunity cost of funds is 6. 5 percent per year.