Problem 4

On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4, time at which they will be paid in dollars. VW decides to

hedge its dollar position by entering in International Monetary Mark (IMM) futures contracts. The spot rate is EURO1.8347/$, and the March futures price is EURO 1.8002/$.

Calculate the number of futures contracts that VW must buy (or sell) to offset its dollar exchange risk on the parts contract. One contract involves EURO125,000.

On March 4, the spot rate turns out to be EURO1.7920/$, while the March futures price is EURO1.7968/$. Calculate VWs net EURO gain or loss on its futures position. Compare this figure with VWs gain or loss on its unhedged position.