An American Financial Institution has made a loan commitment of 10,000,000 to a client which is likely to be

taken down in 6 months.

The current spot exchange rate is $1.50/.

1. Is the FI exposed to a dollar depreciation or appreciation?

2. If the spot rate six months from today is $1.6/, what amount of dollars is needed if the loan is taken down and the FI is not hedged?

3. If it decides to hedge using futures, should the FI buy or sell futures?

4. A six month futures contract is available for $1.53/.

What net amount would be needed to fund the loan at the end of six months if the FI had hedged using the 10 million futures contract?

Assume that the futures prices are equal to the spot prices at the time of payment.

Textbook: Fundamentals of Futures and Options by Jon C. Hull, 2017

Pearson Publishing, ISBN: 9780134083247