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+654 Part V: Index Options and Futures 
+stock ownership. Moreover, he is able to establish that hedge at a much smaller com­
+mission cost and with much less work than would be required to sell thousands of 
+shares of stock. Similar thinking applies to all the cash markets that underlie futures 
+contracts. The ability to hedge is important for people who must deal in the "cash" 
+market, because it gives them price protection as well as allowing them to be more 
+efficient in their pricing and profitability. A general example may be useful to demon­
+strate the hedging concept. 
+Example: An international businessman based in the United States obtains a large 
+contract to supply a Swiss manufacturer. The manufacturer wishes to pay in Swiss 
+francs, but the payment is not due until the goods are delivered six months from now. 
+The U.S. businessman is obviously delighted to have the contract, but perhaps is not 
+so delighted to have the contract paid in francs six months from now. If the U.S. dol­
+lar becomes stronger relative to the Swiss franc, the U.S. businessman will be receiv­
+ing Swiss francs which will be worth fewer dollars for his contract than he originally 
+thought he would. In fact, if he is working on a narrow profit margin, he might even 
+suffer a loss if the Swiss franc becomes too weak with respect to the dollar. 
+A futures contract on the Swiss franc may be appropriate for the U.S. business­
+man. He is "long" Swiss francs via his contract (that is, he will get francs in six months, 
+so he is exposed to their fluctuations during that time). He might sell short a Swiss 
+franc futures contract that expires in six months in order to lock in his current profit 
+margin. Once he sells the future, he locks in a profit no matter what happens. 
+The future's profit and loss are measured in dollars since it trades on a U.S. 
+exchange. If the Swiss franc becomes stronger over the six-month period, he will lose 
+money on the futures sale, but will receive more dollars for the sale of his products. 
+Conversely, if the franc becomes weak, he will receive fewer dollars from the Swiss 
+businessman, but his futures contract sale will show a profit. 111 either case, the 
+futures contract enables him to lock in a future price (hence the name "futures") that 
+is profitable to him at today's level. 
+The reader should note that there are certain specific factors that the hedger 
+must take into consideration. Recall that the hedger of stocks faces possible problems 
+when he sells futures to hedge his stock portfolio. First, there is the problem of sell­
+ing futures below their fair value; changes in interest rates or dividend payouts can 
+affect the hedge as well. The U.S. businessman who is attempting to hedge his Swiss 
+francs may face similar problems. Certain items such as short-term interest rates, 
+which affect the cost of carry, and other factors may cause the Swiss franc futures to 
+trade at a premium or discount to the cash price. That is, there is not necessarily a 
+complete one-to-one relationship between the futures price and the cash price.