In early April, a U.S. Company is expecting to receive 1,250,000 Euros in June from its European customers, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in June.

At this time the spot exchange rate Euro is $1.086 USD. The CME Group future settle rate for June Euro FX futures contacts is 1 Euro = $1.091 USD, with each futures contract for 125,000 Euros per contract.

a. What position and how many contracts should the financial manager take for the hedge?   Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract),


b.Suppose in June the spot rate for the Euro rises instead to $1.1946 USD and Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?

c.   Would the U.S. Company have done better getting options on the Euro futures contract instead for this hedge? Explain why or why not.

Answer rating: 100% (QA)

Answer A This is a Short position B As company will sell Eur... View the full answer