A Russian company must pay to its Swiss subcontractor 6 060 000 Swiss francs (CHF) for the trade agreed today. The payment is due in the middle of June.

a) To what kind of currency risk is the Russian company exposed?

b) How could it hedge best against that risk with using either June euro futures for which the contract size is CHF 125,000 or June ruble futures for which the contract size is RUB 2,500,000. The urrent spot rate for CHF is 71 rubles, whereas the corresponding June futures rate is 73 rubles. The delivery date for the currency futures is the third Wednesday of contract month.

c) By the middle of June the franc has appreciated against the ruble so that the spot rate is then 77. Assess the efficiency of hedging bt calculating the profits and losses from spot and futures transactions (Assume that the convergence of spot to futures has decreased the basis to zero by the middle of June).

d) Was the hedge perfect? If not, why?