1. In April, a U.S. Company is expecting to receive 3,500,000 Euros in June to its European customers and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in June.

At this time in early April the spot exchange rate Euro was $1.175 USD. The CME Group future settle rate for June Euro FX futures contacts at this time is listed as 1 Euro = $1.1651 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______

2. Suppose in June the spot rate for the Euro falls to$1.058 USD and the futures settle rate falls to $1.049 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?

Spot Opportunity Gain or Loss _________

Futures Gain or Loss ___________

Net Hedging Result ___________ (Gain less Loss)

c. If the Euro had gone up instead of falling in June, would the U.S. Company have done better getting options on the Euro futures contracts instead for this hedge? Explain why or why not.