[CFA2, CFA4, CFA5]

Jackson, Inc., is a multinational company based in West Point, Mississippi, that makes freight cars. One-third of Jacksons sales occur in the Netherlands. To manufacture the cars, the firm must import approximately half of the raw materials from Canada.

Two months from now, Jackson plans to sell freight cars to a Dutch firm for 15 million. To protect the company from any adverse moves in exchange rates, Jackson enters into a 15 million futures contract due in 60 days. Jackson also enters into a 60-day futures contract to lock in C$8.5 million, which will be used to purchase steel from a supplier.

The current euro to U.S. dollar exchange rate is .79/$1 while the Canadian dollar to U.S. dollar exchange rate is C$1.30/$1. The 60-day euro to U.S. dollar rate is .80/$1, while the Canadian dollar to U.S. dollar rate is C$1.33/$1. At the end of the two months, the actual euro to U.S. dollar exchange rate is .90/$1 and the actual Canadian dollar to U.S. dollar rate is C$1.20/$1.

To help understand the relationships, Jacksons chief risk officer, Dr. Charles Miles, has put together the following table on hedging currency positions:

Currency Exposure Position Action Receiving foreign currency Long Buy forward contracts Paying foreign currency Short Sell forward contracts When hedging its exchange rate risk on the freight car sale, Jackson used a futures contract to:

Sell 15 million in exchange for $18.75 million.

Buy 15 million in exchange for $18.75 million.

Sell 15 million in exchange for $16.67 million.

To hedge the foreign exchange risk relative to the Canadian dollar, Jackson should:

Buy a futures contract to exchange $7,083,333 for C$8.5 million.

Buy a futures contract to exchange $6,390,977 for C$8.5 million.

Sell a futures contract to exchange $6,390,977 for C$8.5 million.

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In regard to the table that Dr. Miles constructed, which of the following is true?

The receiving foreign currency position is correct; the action is incorrect.

The receiving foreign currency position is incorrect; the action is also incorrect.