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You would like to hedge your accounts payable due one-year from now of Indian Rupees (IR) 10 million in the Futures market. But there are no Futures contract available on Indian Rupees. However, Futures contract on Singapore dollar (S$) and Hong Kong dollar (HK$) are available. On running regressions to observe their correlations, you found the following:
RIR = 0.05 + 1.1 x Rhk$ with R2 = 0.75
RIR = 0.04 + 1.3 x Rs$ with R2 = 0.90
Spot Rates for currencies are: $0.02/IR, $0.10/HK$, $0.40/S$. Contract Sizes: HK$200,000 S$50,000 a) Which is the best futures contract (HK$ or S$) to hedge your accounts payable of Indian Rupees with? b) How many futures contracts do you need? Do you go short or long?