Today is 1 September. Your business is based in Russia and you regularly sell heating oil to clients in Germany.

Your next sale will be at the end of October in the quantity of 120,000 gallons of heating oil. Your invoice will be denominated in Euros.

Relevant prices for heating oil are:

• spot price: EUR 3 per gallon
• forward price with Oct delivery: EUR 3.20 per gallon

Relevant exchange rates between Euros (EUR) and Russian Rubles (RUB) are:

• spot exchange rate EUR 1.0000 = RUB 58.5000
• forward rate with Oct delivery: EUR 1.0000 = RUB 60.0000

Required:

Your aim is to fully hedge the risks involved in this sale of heating oil to Germany.

Describe the forward contract/s you will enter today to fully hedge the risks involved in this transaction.

You must be very clear regarding: (i) whether you enter a long or short position, (ii) what the underlying asset is, (iii) the quantity and price that would be on the forward contract.

Answer rating: 100% (QA)

I will need to enter into a forward contract in order to hedge the currency risk involved in this tr... View the full answer