A FI is planning to hedge its one-year, 100 million Swiss Francs (SF)- denominated loan against exchange rate risk. The current spot rate is 0.60/SF. A 1-year SF future contract is currently trading at $0.58/SF. SF futures are sold in standardized units of SF125,000.

a. Should the FI be worried about the SF appreciating or depreciating? Why? Show your work.

b. Should the FI buy or sell futures to hedge against exchange rate risk exposure? Why? Show your work.

c. How many futures contracts should the FI buy or sell if a regression of past exchanges in the spot exchange rate on changes in the future exchange rate generates an estimated slope of 1.4?

d. Show exactly how the FI is hedged if it repatriates its principal of SF100 million at year end, the spot exchange rate of SF at last year end is $0.55/SF, and the forward exchange rate is $0.54443/SF