1. In September, a U.S. Company is expecting to receive 4,000,000 Euros in December from its European customers and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar when the Euros will be converted to U.S. dollars in December.

At this time in September the spot exchange rate Euro was $1.182 USD. The CME Group future settle rate for December Euro FX futures contacts at this time is listed as 1 Euro = $1.17225 USD, with each futures contract for 125,000 Euros per contract.

a. What position and how many contracts should the financial manager get 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 December the spot rate for the Euro falls to $1.0638 USD and the futures settle rate falls to $1.055025 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 Loss)