(5) Mr. Flux, the manager of Knickerbocker Industries Inc., a US importer of European food products is facing the problem of having to devise a hedge of a 25 million pesos outflow, expected in 3 months. He assigned the task to Mr. Knowitall, his assistant. Since there is no futures contract on the peso available, Mr. Knowitall suggested that this exposure can be hedged using a combination of SF, and futures contracts. Upon receiving the assignment, Mr. Knowitall reminded Mr. Flux that he is leaving for vacation the next day. However he would work out a solution to the problem over night and send it via email to Mr. Flux.

The next morning Mr. Flux opened the email message sent by Mr. Knowitall and saw the following: S $/peso = 0.01 + 0.94 f $/SF + 1.55 f $/ + 0.33 f $/ [t=9.50] [t=3.34] [t=1.47] R 2=0.667

Upon seeing the above, Mr. Flux got confused and did not know what to do. All he remembered is that the size of the SF, and futures contracts is 125,000SF, 100,000 and 62,500 , respectively.

Can you help him devise the hedge?