An FI has an asset investment in euros. The FI expects the exchange rate of dollars/ euro

Question:

An FI has an asset investment in euros. The FI expects the exchange rate of dollars/

euro to increase by the maturity of the asset.

a. Is the dollar appreciating or depreciating against the euro?

b. To fully hedge the investment, should the FI buy or sell euro futures contracts?

c. If there is perfect correlation between changes in the spot and futures contracts, how should the FI determine the number of contracts necessary to hedge the investment fully?

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Gauri Hendre

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