A US corporation has a payable of 100 million Swedish kronor (SEK) three months from today. 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.
Question: Which currency should the company use for hedging purposes?
Euro (EUR)
US dollar (USD)
Swiss franc (CHF)