31. Derivatives and hedging (CFA Examination Level I) (No calculation is required.)

Michelle Industries issued a Swiss franc-denominated five-year discount notefor SFr200 million. The proceeds were converted to U.S. dollars to purchasecapital equipment in the U.S. The company wants to hedge this currencyexposure and is considering the following alternatives.

a. At-the-money Swiss Franc call options.

b. Swiss Franc forwards.

c. Swiss Franc futures.

Contrast the essential characteristics of each of these three derivative instruments and discuss how Michelle should hedge using each of the instruments.

Evaluate the suitability of each in relation to Michelles hedging objective,including both advantages and disadvantages.