In October, a U.S. Company is expecting to have to pay 1,250,000 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 when the payment is due. At this time the spot exchange rate Euro is $1.1420 USD. The CME Group future settle rate for a December Euro FX futures contacts is 1 Euro = $1.1427 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_______________________________

b. Suppose in December the spot rate for the Euro changes to $1.2562 USD and the Euro futures FX price changes to $1.2569 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 _____________