Use the following information to answer Q6 and Q7.

You are the CFO at a U.S. exporter. It is now June and in December you will receive EUR750,000 from your European customer which you must immediately convert into USD. The spot EUR/USD exchange rate is 1.4562. You would like to hedge your exchange rate risk using the Chicago Mercantile Exchange December EUR/USD futures contract. The notional amount for the futures contract is EUR125,000. The interest rate in the U.S. is 4.5% and the interest rate in the Euro area is 2.25%. There are 183 days from now until the December futures contract expires and a 360 day-count is used to represent one year.

Q6. Using the Decembers futures price you calculated in the previous question, explain how you could hedge your exchange rate risk. Include the number of contracts you would need to transact and the total amount of USD you expect to receive.

Q7. Assume the spot exchange rate is 1.4855 in December just prior to the expiry of the futures contract. At this time you make a reversing trade in the futures market. Explain the profits or losses you would make on your futures and spot market transactions in December, and the outcome of your hedge.