Suppose you are the risk manager of a Swiss beer exporter that regularly sells in the United States. The mission of your department is to minimize currency exposure, using currency futures and currency options.

On the 18th of September, 2021, you received a purchase order for 50,000 barrels of beer from a U.S. wholesaler at a wholesale price of US$28.75 per barrel. The U.S. wholesaler agreed to pay on the 28th of October, 2021.

Assume it is now October 28, 2021, and you have just received the payment from your U.S. wholesaler. Use the attached exchange rates and prices of financial instruments to answer the following questions.

1. With hindsight, and for this specific example, was hedging with options better or worse than hedging with futures? Explain your answer. Would your answer change if in the future your goal is to hedge every single currency exposure as closely as possible while minimizing your costs?

Data is given below

Tue Exchange Rates for Assignment 1 Wall Street Journal - September 19, 2021 Exchange Rates Wednesday, September 18, 2021 U.S.$ equiv. Currency per U.S.$ Country Wed Tue Wed Switzerland (Franc) 1.1232 1.1227 0.8904 0.8907 30-Day Forward 1.1290 1.1251 0.8858 0.8888 90-Day Forward 1.1332 1.1297 0.8821 0.8852 180-Day Forward 1.1416 1.1373 0.8761 0.8792 Options Philadelphia Exchange Swiss Franc 112.32 62,500 Swiss Francs - cents per unit Calls Puts Vol. Vol. Last 110 Dec 178 3.11 111 Oct 120 0.27 Dec 56 2.77 112 Oct 0.48 112 Nov 1.11 112 Dec 119 1.11 113 Oct 11 0.85 113 Dec 15 1.62 114 Oct 127 0.49 114 Nov 38 1.77 116 Dec 61 3.28 Last 111 Page: 1 A D H Open Interest 47,301 1,583 450 ... B G 34 35 Futures Prices 36 37 Swiss Franc (CME) 125,000 francs; $ per franc 38 Lifetime 1 39 Open High Low Settle Change High Low 40 Dec 2021 1.1298 1.1371 1.1283 1.1332 +0.0015 1.2019 1.11131 41 Mar 2022 1.1426 1.1441 1.1405 1.1409 +0.0015 1.1793 1.1276! 42 Jun 2022 +0.0015 1.1810 1.1373 43 Est. vol. 35,556; vol. Tu 18,620 44 45 46 47 48 49 50 Wall Street Journal - October 29, 2021 51 52 53 Exchange Rates 54 Monday, October 28, 2021 55 56 U.S.$ equiv. Currency per U.S.$ 57 Country Mon Fri Mon 58 Switzerland (Franc) 1.1189 1.1179 0.8937 0.8945 59 30-Day Forward 1.1210 1.1200 0.8921 0.8928 60 90-Day Forward 1.1256 1.1246 0.8885 0.8893 61 180-Day Forward 1.1324 1.1312 0.8831 0.8840 62 63 Fri P9904 ... Dec I.. II. II. 64 65 Options 66 Philadelphia Exchange 67 68 Swiss Franc 111.89 69 62,500 Swiss Francs - cents per unit 70 Calls Puts 71 Vol. Last Vol. Last 72 109 Nov 53 0.07 73 110 Nov 78 0.12 74 111 46 2.26 75 111 Nov 41 1.00 76 112 Nov 22 0.58 77 78 79 80 Futures Prices 81 82 Swiss Franc (CME) 125,000 francs; $ per franc 83 Lifetime 84 Open High Low Settle Change High Low 85 Dec 2021 1.1200 1.1242 1.1178 1.1222 +0.0007 1.2019 1.1040| 86 Mar 2022 1.1261 1.1305 1.1261 1.1290 +0.0007 1.1793 1.11131 87 Jun 2022 1.1370 1.1373 1.1365 1.1359 +0.0007 1.1810 1.1188| 88 Est. vol. 13,446, vol. Fr 21,774 | 89 90 Open Interest 67,124 5,471 4,267 91 Tue Exchange Rates for Assignment 1 Wall Street Journal - September 19, 2021 Exchange Rates Wednesday, September 18, 2021 U.S.$ equiv. Currency per U.S.$ Country Wed Tue Wed Switzerland (Franc) 1.1232 1.1227 0.8904 0.8907 30-Day Forward 1.1290 1.1251 0.8858 0.8888 90-Day Forward 1.1332 1.1297 0.8821 0.8852 180-Day Forward 1.1416 1.1373 0.8761 0.8792 Options Philadelphia Exchange Swiss Franc 112.32 62,500 Swiss Francs - cents per unit Calls Puts Vol. Vol. Last 110 Dec 178 3.11 111 Oct 120 0.27 Dec 56 2.77 112 Oct 0.48 112 Nov 1.11 112 Dec 119 1.11 113 Oct 11 0.85 113 Dec 15 1.62 114 Oct 127 0.49 114 Nov 38 1.77 116 Dec 61 3.28 Last 111 Page: 1 A D H Open Interest 47,301 1,583 450 ... B G 34 35 Futures Prices 36 37 Swiss Franc (CME) 125,000 francs; $ per franc 38 Lifetime 1 39 Open High Low Settle Change High Low 40 Dec 2021 1.1298 1.1371 1.1283 1.1332 +0.0015 1.2019 1.11131 41 Mar 2022 1.1426 1.1441 1.1405 1.1409 +0.0015 1.1793 1.1276! 42 Jun 2022 +0.0015 1.1810 1.1373 43 Est. vol. 35,556; vol. Tu 18,620 44 45 46 47 48 49 50 Wall Street Journal - October 29, 2021 51 52 53 Exchange Rates 54 Monday, October 28, 2021 55 56 U.S.$ equiv. Currency per U.S.$ 57 Country Mon Fri Mon 58 Switzerland (Franc) 1.1189 1.1179 0.8937 0.8945 59 30-Day Forward 1.1210 1.1200 0.8921 0.8928 60 90-Day Forward 1.1256 1.1246 0.8885 0.8893 61 180-Day Forward 1.1324 1.1312 0.8831 0.8840 62 63 Fri P9904 ... Dec I.. II. II. 64 65 Options 66 Philadelphia Exchange 67 68 Swiss Franc 111.89 69 62,500 Swiss Francs - cents per unit 70 Calls Puts 71 Vol. Last Vol. Last 72 109 Nov 53 0.07 73 110 Nov 78 0.12 74 111 46 2.26 75 111 Nov 41 1.00 76 112 Nov 22 0.58 77 78 79 80 Futures Prices 81 82 Swiss Franc (CME) 125,000 francs; $ per franc 83 Lifetime 84 Open High Low Settle Change High Low 85 Dec 2021 1.1200 1.1242 1.1178 1.1222 +0.0007 1.2019 1.1040| 86 Mar 2022 1.1261 1.1305 1.1261 1.1290 +0.0007 1.1793 1.11131 87 Jun 2022 1.1370 1.1373 1.1365 1.1359 +0.0007 1.1810 1.1188| 88 Est. vol. 13,446, vol. Fr 21,774 | 89 90 Open Interest 67,124 5,471 4,267 91