Question: Question 5 (15 points 5+5+5 points) A US based corporation has decided to invest in an investment based in Sweden for which they require SEK

Question 5 (15 points 5+5+5 points) A US based corporation has

Question 5 (15 points 5+5+5 points) A US based corporation has decided to invest in an investment based in Sweden for which they require SEK 100mm (100 million Swedish Kronor). The company wishes to hedge changes in the USD-SEK using forward contracts on either the Euro (EUR) or the Swiss Franc (CHF) as it is cheaper (than USD-SEK). They have the following estimates based on market information available to them: -If EUR forwards are used: standard deviation (SD) of quarterly changes in the USD/SEK spot rate is 0.007 and the SD for quarterly changes in the USD/EUR forward is 0.018, with the correlation coefficient between the changes being 0.9. -If CHF forwards are used: the SD for the USD/SEK spot is 0.007 as mentioned already, but the SD for quarterly changes in the USD/CHF forward is 0.023 and the correlation coefficient between the changes is 0.85. Finally CHF/USD spot is 1.06, the 3 year risk free interest rate is 0.35% and 0.5% in the US and Switzerland respectively. The EUR/USD spot is 1.1, and the 1 year risk free rate in Germany is 0.15%. Please give your answer to this question in 4 decimal places. A) Which currency should the company use for hedging and why? i.e. should they use USD/CHF or USD/EUR? B) Calculate the 3 year USD/EUR forward rate C) Calculate the 3 year USD/CHF forward rate Question 5 (15 points 5+5+5 points) A US based corporation has decided to invest in an investment based in Sweden for which they require SEK 100mm (100 million Swedish Kronor). The company wishes to hedge changes in the USD-SEK using forward contracts on either the Euro (EUR) or the Swiss Franc (CHF) as it is cheaper (than USD-SEK). They have the following estimates based on market information available to them: -If EUR forwards are used: standard deviation (SD) of quarterly changes in the USD/SEK spot rate is 0.007 and the SD for quarterly changes in the USD/EUR forward is 0.018, with the correlation coefficient between the changes being 0.9. -If CHF forwards are used: the SD for the USD/SEK spot is 0.007 as mentioned already, but the SD for quarterly changes in the USD/CHF forward is 0.023 and the correlation coefficient between the changes is 0.85. Finally CHF/USD spot is 1.06, the 3 year risk free interest rate is 0.35% and 0.5% in the US and Switzerland respectively. The EUR/USD spot is 1.1, and the 1 year risk free rate in Germany is 0.15%. Please give your answer to this question in 4 decimal places. A) Which currency should the company use for hedging and why? i.e. should they use USD/CHF or USD/EUR? B) Calculate the 3 year USD/EUR forward rate C) Calculate the 3 year USD/CHF forward rate

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