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A U.S. firm is paying 4.55m EUR in December. December EUR Futures are available on the Chicago Mercantile Exchange (CME) and currently trade at 1.07075
A U.S. firm is paying 4.55m EUR in December. December EUR Futures are available on the Chicago
Mercantile Exchange (CME) and currently trade at 1.07075 EUR/USD. The contract has an initial
margin of 110% of the maintenance margin.
a) Describe the firms FX spot market currency exposure (long/short, size of exposure) before
hedging.
b) Describe how this firm would hedge its position using futures contracts.
c) How many contract positions on the CME should be taken if the goal is to minimise the
firms exposure to risk?
d) What will be the total initial futures cash flow required (amount and currency)?
e) Assuming that the exposure and contract maturity dates are the same, what is the expected
total (Physical + Hedge) net USD cashflow? (You may ignore the time value of money and you may
assume that the Unbiased Expectations Hypothesis holds)
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