An American investor is looking to buy 1000 shares of Swiss International Airlines in about six months. The shares are currently trading at CHF950 each. She does not want to take any currency risk over the next six months. The spot exchange rate is $0.7254/CHF whereas the six-month futures exchange rate is $0.7250/CHF. Each futures contract is for CHF125,000.

i). If the share price stays at the same level in six months as it is today, what should be the strategy of the investor to hedge currency risk?

ii). How many contracts should she use?

iii). Suppose, she is ready to buy the stocks in five months. Determine the overall performance of the hedge by evaluating the position of the investor if in five-month time the share price drops to CHF926.50, then the spot exchange rate is $0.7301/CHF, and the futures exchange rate for the same contract is $0.7295/CHF.

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i If the share price stays at the same level in six months as it is today the strategy should be to ... View the full answer