You want to hedge the eur value of a cad 1m inflow using futures contracts. On Germany's

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You want to hedge the eur value of a cad 1m inflow using futures contracts. On Germany's exchange, there is a futures contract for usd 100,000 at eur/usd 1.5.

(a) Your assistant runs a bunch of regressions:

i. ΔS[EUR/CAD] = α1 + β1 Δf[USD/EUR]

ii. ΔS[EUR/CAD] = α2 + β2 Δf[EUR/USD]

iii. ΔS[CAD/EUR] = α3 + β3 Δf[EUR/USD]

iv. ΔS[CAD/EUR] = α4 + β4 Δf[USD/EUR]

Which regression is relevant to you?

(b) If the relevant β were 0.83, how many contracts do you buy? sell?

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International Finance Putting Theory Into Practice

ISBN: 978-0691136677

1st edition

Authors: Piet Sercu

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Question Posted: Aug 07, 2017 09:44 AM

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You want to hedge the eur value of a cad 1m inflow using futures contracts. On Germany's

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a Regression 2 Both sides of the regression take the eur ...View the full answer

International Finance Putting Theory Into Practice

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