In October, a U$.$S$.$ Company is expecting to have to pay $1,250,000$ British

Pounds to its British suppliers in December and wants to hedge against a rise in

the value of the British Pound relative to the U$.$S$.$ dollar in December

At this time, the spot exchange rate for a British Pound was $$1\mathrm{.}2126$ USD. The

CME Group futures settle rate for December British Pound FX futures contacts

is $1$ British Pound $=$$$1\mathrm{.}2215$ USD, with each futures contract for $62,500$ British

pounds per contract.

a$.$ What position and how many contracts should the financial manager take for the

hedge? Explain why. $($hint # contracts $=$ Amount of British Pounds Hedging $/$

$62,500$ per contract$),$

Type of Position

$($short or long$)$

Explain why

How many contracts should you get?

Number of Contracts

b$.$ Suppose in December the spot rate for the British Pound rises to $$1\mathrm{.}3126$ USD and

the futures settle rate rises to $$1\mathrm{.}3215$ 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

$($Gain $-$ Loss$)$