Question
In early October, a U.S. Company is expecting to pay 2,250,000 Euros in December to its European suppliers and wants to hedge against a rise
- In early October, a U.S. Company is expecting to pay 2,250,000 Euros in December to its European suppliers and wants to hedge against a rise in the value of the Euro relative to the U.S. dollar in December.
At this time in early October the spot exchange rate Euro was $1.175 USD. The CME Group future settle rate for December 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______
- Suppose in December the spot rate for the Euro rises to $1.190 USD and the futures settle rate changes to $1.1180 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
Spot Gain or Loss ________ Futures Gain or Loss ________
Net Hedging Result ___________ (Futures Gain or Loss Spot Gain or Loss)
c. If the Euro had gone down instead of rising in December, would the U.S. Company have done better getting options on the Euro futures contracts instead for this hedge? Explain why or why not.
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