MITISHAMBA Co$.,$ a USA$-$based company specializing in the supply of medical

equipment to both the USA and Europe, finds itself on November $30,2023,$ engaging

in a recently finalized deal with a Swiss customer. The agreement involves the sale

of CHF$12\mathrm{.}3$ million worth of medical equipment, with the customer scheduled to make

payment on May $31,2024.$ To mitigate the foreign exchange risk associated with this

transaction, MITISHAMBA Co$.\text{'}$s Treasury Department aims to employ traded futures

or options to the fullest extent possible. Any portion of the transaction value not

covered by a futures or options contract will be hedged using the forward market.

Exchange rates $($quoted as US$$/$CHF $1)$

Spot $1\mathrm{.}0292-1\mathrm{.}0309$

Three months forward $1\mathrm{.}0327-1\mathrm{.}0347$

Six months forward $1\mathrm{.}0358-1\mathrm{.}0380$

Current futures $($contract size CHF $125,000,$ futures price quoted as US$ per CHF$1)$

Futures price:

December $1\mathrm{.}0318$

March $1\mathrm{.}0345$

June $1\mathrm{.}0369$Page $2$ of $2$

Currency options

Contract size CHF $125,000$

Exercise price quotation US$ per CHF$1$

Premium: US cents per CHF$1$

Calls Puts

Exercise Price December March June December March June

$1\mathrm{.}03750\mathrm{.}470\mathrm{.}500\mathrm{.}530\mathrm{.}740\mathrm{.}790\mathrm{.}86$

Futures and options contracts reach maturity at the end of each month.

Comments from the Non$-$Executive Director

A recently appointed Non$-$Executive Director has been briefed on the operations of the

Treasury Department and has raised several inquiries about the hedging activities. He

aims to comprehend the importance of basis risk concerning futures and seeks insights

into the notable characteristics of over$-$the$-$counter forward contracts and options.

Additionally, the director is curious about why MITISHAMBA Co$.$ leans towards utilizing

exchange$-$traded derivatives for hedging.

The Non$-$Executive Director has also been introduced to the concept of the mark$-$tomarket process and desires an understanding of the associated terminology and

procedures, using the sale transaction with the Swiss customer as an example. The

Treasury Department has provided pertinent information to address these inquiries. The

contract specifications for the CHF futures contract specify that an initial margin of

US$$1,450$ per contract is mandatory, along with a maintenance margin of US$$1,360$ per

contract. The tick size on the contract is US$$0\mathrm{.}0001,$ and the tick value is US$$12\mathrm{.}50.$ For

the purpose of analysis, it is assumed that on the initial day when MITISHAMBA Co$.$ holds

the future contracts, the loss per contract amounts to US$$0\mathrm{.}0011$Clarify to the Non$-$Executive Director how the mark$-$to$-$market process operates

for the CHF futures, elucidating the significance of the data provided by the

Treasury Department