Suppose you are working for a company that does business with Australia. Your company has closed a
Question:
Suppose you are working for a company that does business with Australia. Your company has closed a deal where you will provide consulting services to the Australian firm and they will pay you a sum of 300,000 AUD pesos in January 2021. Your boss asks you to hedge to exchange rate risk that you face.
The CME AUD contract has a contract size of 100,000 AUD. The current exchange rate is 0.72 $/AUD and the current price of a March 2021 futures contract is 0.71$/AUD.
In January 2021 when you lift your hedge, the spot exchange rate moved to 0.70 $/AUD and the March 2021 futures price settles at 0.68 $/AUD.
Assume transaction fees of $15 per roundtrip per futures contract and a hedge ratio of 1.0 when answering the questions below. Round to the nearest whole number of contracts.
a). Did you first go long or short futures to initiate your hedge?
LONG | |
SHORT |
b). How many futures contracts do you trade for your hedge?
c). What is the gain (loss) in the futures market (after accounting for transaction fees of $15 per roundtrip)?
Enter your answer without dollar signs or commas. For a profit, enter a positive number. For a loss, enter a negative number.
d). What is the net outcome of the hedge in terms of $/AUD?