A US exporter will receive for the good exported to France EUR2.5 million in 5 months and another EUR2.5 million in 11 months. The exporter decides that these amounts will be exchanged into USD and deposited in USD in NYC as soon as they materialized. The current spot exchange rate is USD1.35/EUR; current futures exchange rate is USD1.50/EUR for delivery 6 months later USD1.60/EUR for delivery 12 months later. There are 125,000 euros in a contract.

A. Use a time table to show the hedge opened on date t by the US exporter. The number of futures to use in the hedge is: n = VS/VF

B. Use the same time table to show the spot and futures activities taken by the exporter 5 months and 11 months from t, given that the spot rates on those dates were USD1.20/EUR and USD1.35EUR, respectively; while the 1-month futures 5 months from t were USD1.30/EUR and the 1-month futures 11 month from t were USD1.50/EUR.

Date Spot market Futures Market

t