Q1/ A Russian company must pay to its Swiss subcontractor 6,060,000 Swiss francs for the trade agreed today. The payment is due in the middle of June.

a1) How could it hedge best against risk using either June euro futures for which the contract size is CHF 125,000 or June ruble futures for which the contract size is RUB2,500,000. The current sport 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.

a2) By the middle of June the franc has has appreciated against the ruble so that the spot rate is then 77. Assess the efficiency of hedging by 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).

a3) Was the hedge perfect? If not, why?

b) Six months ago an investor opened a long position on the 12-month forward contract on a non-dividend paying stock index that was then worth 3,000. The same asset is now worth 2,900. Now the term structure of the short interest rates is exactly like indicated by the forward rates six months ago. The 3-month spot rate was then 3% p.a, whereas the corresponding spot rates for the maturities of 6,9 and 12 months were 4%, 5% and 6% (all p.a). What is the value of the forward contract for the investor now.