You want to hedge the Brazilian real (BRR) value of a 1 million Canadian dollar (CAD) inflow using futures contracts. On Brazil's exchange, there is a futures contract for US$100,000 at 1.5 BRR/US$.

a) Your assistant runs a bunch of regressions:

1. S [BRR/CAD] = 1 + 1 f [US$/BRR]

2. S [BRR/CAD] = 2 + 2 f [BRR/US$]

3. S [CAD/BRR] = 3 + 3 f [BRR/US$]

4. S [CAD/BRR] = 4 + 4 f [US$/BRR]

Which regression is relevant to you?

b) If the relevant is 0.83 how many contracts do you buy/sell?

c) We assumed that there was a $ futures contract in Brazil, with a fixed number of US$ (100,000 units) and a variable BRR/US$ price. What f there is no Brazilian futures exchange? Then, you'd have to go to a US exchange, where the number of BRR per contract is fixed (at, say, 125,000) rather than the number of US$. How many US$/BRR contacts will you buy?