The exchange rate of the United States dollar (USD) to the Brazilian real (BRL) was 0.5793 USD/BRL on October 21, 2010. On January 17, 2011 it had moved to 0.5934 USD/BRL. During the same time period, the 3-month BRL futures had moved from 0.5826 USD/BRL. Assume that the expiration date of this BRL futures contract is December 21, 2010.

1. If your organization imported BRL 0.5 million worth of goods, how many BRL futures contracts will be needed to hedge against currency risk? {Assume that each BRL futures contract has a face value of BRL 100,000}

2. Describe the futures hedging strategy. What is the result of the 3-month hedging strategy that you have implemented?

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To determine the number of BRL futures contracts needed to hedge against currency risk we can follow ... View the full answer