Note: I only need the answer for question 6. I have included the questions and answers for the first 5 questions as they are all tied together.

QUESTION 1

1. For this and the next 6 questions. A multinational financial institution in Chicago wishes to transfer 50,000,000 from a bank in Berlin, Germany. The transfer will take place in February although the transaction will be hedged with March euro futures contract - which matures one month after the month of the funds transfer. Current spot exchange rate for the euro is $1.30. Euro futures price for March delivery is $1.28. The size for one euro futures contract is 125,000. Calculate the futures price per contract. Caution! Errors carry over into the next problems.

Answer: $160,000

1 points

QUESTION 2

1. With respect to the above transaction, calculate the hedge ratio (round down).

Answer: About 406

1 points

QUESTION 3

1. To hedge the exchange rate risk involved in this transaction, the Chicago firm should

Answer: Buy euro futures

1 points

QUESTION 4

1. Suppose that on the hedge lifting date in February the value of the euro has dropped to $1.25. Also on this date, the March euro futures price is $1.24. How much would the 50,000,000 convert to - in USD - in the international transfer?

1. Answer: $64,000,000

1 points

QUESTION 5

1. Calculate the profit or loss on the spot position.

Answer: -$500,000

1 points

QUESTION 6

1. Notice that the Chicago firm will offset the futures position in February. Calculate the profit on the futures transaction, taking into account the total number of contracts involved.
2. -$2,500,000
3. $2,500,000
4. -$470,000
5. -$2,030,000
6. None of the above