A whole-sale import firm expects to pay 5 million Swiss Franc (CHF) in three months for the delivery of branded watches. The current exchange rate is $0.95 per CHF. Three-month futures rate is $0.90 per CHF. The firm would like to lock-in the exchange rate. One futures contract size is CHF 125,000, and one (call or put) currency option contract is CHF 62,500.

(i)If you decide to use futures on CHF, which position (Long or Short) will you take on futures and how many contracts will you need to fully hedge?

(ii)Instead of using futures, you want to enjoy upside potential while protecting from downside risk. Should you buy a PUT option or a CALL option on CHF and how many PUT or CALL contracts will you need to fully hedge? Premium for CALL is $0.004 and premium for PUT is $0.005.

(iii)Using your answer from question (ii), what is your net proceed in dollar (including premium) if the spot rate at the end of 90 days is $0.91/CHF?

(iv) Using your answer from question (ii), what is your net proceed in dollar (including premium) if the spot rate at the end of 90 days is $0.97/CHF?