financial derivatives

12. A long-lost relative of yours died, and as part of the trust, you must invest 100 million Swedish kronor (SEK) in 3-months. You wish to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF). You estimate the following: - EUR forwards: 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. - CHF forwards: 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 3-month USD/EUR forward rate is 1.071, and the current 3-month USD/CHF forward rate is 0.602. 1. Which currency should you use for hedging? 2. What is the minimum-variance hedge position? Indicate if this is to be long or short. 12. A long-lost relative of yours died, and as part of the trust, you must invest 100 million Swedish kronor (SEK) in 3-months. You wish to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF). You estimate the following: - EUR forwards: 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. - CHF forwards: 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 3-month USD/EUR forward rate is 1.071, and the current 3-month USD/CHF forward rate is 0.602. 1. Which currency should you use for hedging? 2. What is the minimum-variance hedge position? Indicate if this is to be long or short