A company enters into a futures contract with the intent of hedging an account payable of 400,000
Question:
A company enters into a futures contract with the intent of hedging an account payable of 400,000 Netherlands Guilders due on December 31. The contract requires that if the U.S. dollar value of 400,000 Netherlands Guilders is greater than $200,000 on December 31, the company will be required to pay the difference. Alternatively, if the U.S. dollar value is less than $200,000, the company will receive the difference. Which of the following statements is correct regarding this contract?
a. The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S. dollar value of the Deutsche mark commitment.
b. The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
c. The futures contract is a contract to sell Deutsche marks at a fixed price.
d. The extra DM400,000 would be accounted for as a speculative investment.
Expert Answer:
