The manager of a U.S. based technology, which just made a sale to Norwegian firm for NOK 25,000,000, is concerned about a decrease in the value of the kroner. The accounts receivable is lue from the Norwegian firm in 3 months. As there is no futures market for USD/NOK, the nanager has decides to use euro futures as a cross-hedge. The current spot price is 0.1050/NOK and the current futures price is $1.0140 /euro. A futures contract on euros is for 125,000 . She has determined that the standard deviation in quarterly changes in the $/NOK rate 0.005 and the standard deviation in quarterly changes in the euro futures contract (\$/euro) is 025. The correlation between these changes is 0.87. a. (1 point) Fearing a fall in the value of the kroner, what position would she want to take in the futures market to hedge the receivable? b. (4 points) What is the minimum variance hedge ratio? c. (3 points) How many euro futures contracts would she need? d. (6 points) Suppose after the receivable is paid, she closes out the futures position at $0.9953/ euro and the spot price of kroner is $0.1018/NOK, what is the overall revenue of the sale (including the spot sale and the gain/loss on the futures contract)? e. (2 point) What is her final effective rate in terms of $/NOK ? The manager of a U.S. based technology, which just made a sale to Norwegian firm for NOK 25,000,000, is concerned about a decrease in the value of the kroner. The accounts receivable is lue from the Norwegian firm in 3 months. As there is no futures market for USD/NOK, the nanager has decides to use euro futures as a cross-hedge. The current spot price is 0.1050/NOK and the current futures price is $1.0140 /euro. A futures contract on euros is for 125,000 . She has determined that the standard deviation in quarterly changes in the $/NOK rate 0.005 and the standard deviation in quarterly changes in the euro futures contract (\$/euro) is 025. The correlation between these changes is 0.87. a. (1 point) Fearing a fall in the value of the kroner, what position would she want to take in the futures market to hedge the receivable? b. (4 points) What is the minimum variance hedge ratio? c. (3 points) How many euro futures contracts would she need? d. (6 points) Suppose after the receivable is paid, she closes out the futures position at $0.9953/ euro and the spot price of kroner is $0.1018/NOK, what is the overall revenue of the sale (including the spot sale and the gain/loss on the futures contract)? e. (2 point) What is her final effective rate in terms of $/NOK
