Question 7. (Foreign Currency Hedges)

On June 17 of a particular year, an American

watch dealer decided to import 100,000 Swiss

watches. Each watch costs SF225. The dealer

would like to hedge against a change in the dol-

lar/Swiss franc exchange rate. The forward rate

was $0.3881. Determine the outcome from the

hedge if it was closed on August 16, when the

spot rate was $0.4434.

Question 15. (Stock Market Hedges)

On March 1, a securities analyst recommended

General Cinema stock as a good purchase in the

early summer. The portfolio manager plans to buy

20,000 shares of the stock on June 1 but is con-

cerned that the market as a whole will be bullish

over the next three months. General Cinemas

stock currently is at 32.88, and the beta is 1.10.

Construct a hedge that will protect against

movements in the stock market as a whole.

Use the September stock index futures, which

is priced at 375.30 on March 1 and has a $500

multiplier. Evaluate the outcome of the hedge

if on June 1 the futures price is 387.30 and

General Cinemas stock price is 38.63.