Question
1. In October, a U.S. Company is expecting to have to receive 1,250,000 Euros in December to its European customers, and wants to hedge against
1. In October, a U.S. Company is expecting to have to receive 1,250,000 Euros in December to its European customers, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in December when the payment will be received.
At this time the spot exchange rate Euro is $0.99 USD. The CME Group future settle rate for a December Euro FX futures contacts is 1 Euro = $0.98 USD, with each futures contract for 125,000 Euros per contract.
a. What position and how many contracts should the financial manager take for the hedge? Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract),
Type of Position _____________ Why this Position_____________
Number of Contracts_______________________________
b. Suppose in December the spot rate for the Euro changes to $0.89 USD and the Euro futures FX price changes to $0.88 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
Spot Gain or Loss ____________ Futures Gain or Loss ___________
Net Hedging Result _____________
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