A US-based corporation has decided to make an investment in Sweden, for which it will require a sum of 100 million Swedish kronor (SEK) in three-months time. The company wishes to hedge changes in the US dollar (USD)-SEK exchange rate using forward contracts on either the euro (EUR) or the Swiss franc (CHF) and has made the following estimates: If EUR forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/EUR forward rate is 0.018, and the correlation between the changes is 0.90. If CHF forwards are used: The standard deviation of quarterly changes in the USD/SEK spot exchange rate is 0.007, the standard deviation of quarterly changes in the USD/CHF forward rate is 0.023, and the correlation between the changes is 0.85.
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