a. A futures exchange in Copenhagen trades futures contracts on the U.S. dollar that expire in seven months with a contract size of $50,000. You estimate β = 1.025 based on the regression st$/DKK = α + β futt$/DKK + et. The r-square of the regression is 0.98. How many futures contracts should you buy to minimize the risk of your hedged position?
b. A commercial bank in Chicago is willing to sell a customized euro ( ) futures contract in any amount and maturing on the date that your obligation is due in six months. Based on the regression st$/DKK = α + β st$/ + et, you estimate β = 1.04. The r-square of the regression is 0.89. How large a position in this euro futures contract should you take to minimize the risk of your hedged position?
c. Euronext in Frankfurt trades /$ futures contracts that expire in seven months and have a contract size of $50,000. Based on the regression st$/DKK = α + β futt$/ + et, you estimate β = 1.05. The r-square of this regression is 0.86. How many futures contracts should you buy to minimize the risk of your hedged position?
d. Which of these futures market hedges provides the best quality?