Question
In early October, a U.S. Company is expecting to pay2,250,000 Euros in December to its European suppliers and wants to hedge against a rise in
- In early October, a U.S. Company is expecting to pay2,250,000 Eurosin December to its European suppliersand 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 Octoberthe spot exchange rate Eurowas $1.175 USD. The CME Group future settle rate for December Euro FX futures contactsat this time is listed as 1 Euro = $1.1651USD, 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 USDand the futures settle ratechanges 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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