Question
A US-based corporation has decided to make an investment in Sweden, for which it will require a sum of 100 million Swedish kronor (SEK) in
- A US-based corporation has decided to make an investment in Sweden, for which it will require a sum of 100 million Swedish kronor (SEK) in three-months ' time. The company wishes to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF) and has made the following estimates:
- If EUR forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/EUR forward rate is 0.018, and the correlation between the changes is 0.90.
- If CHF forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/CHF forward rate is 0.023, and the correlation between the changes is 0.85.
Finally, the current USD/SEK spot rate is 0.104, the current three-month USD/EUR forward rate is 0.471, and the current three-month USD/CHF forward rate is 0.602.
(a) Which currency should the company use for hedging purposes?
(b) What is the minimum-variance hedge position? Indicate if this is to be a long or short position.
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Chronic Regulatory Focus And Financial Decision Making Asset And Portfolio Allocation
Authors: Navin Kumar
1st Edition
9812876936, 978-9812876935
