Question: Your company is a UK based bicycle importer. You have ordered a bicycle worth 1,000,000 to an Italian company. Payment (in Euros) will be made
Your company is a UK based bicycle importer. You have ordered a bicycle worth €1,000,000 to an Italian company. Payment (in Euros) will be made within 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts there are of what type and maturity.
| US dollar equivalent | currency per US dollar | |||||||||||||||||
| Contract Size | Country | Tuesday | Monday | Tuesday | Monday | |||||||||||||
| £ | 10.000 | England (pounds) | $ | 1.9600 | $ | 1.9400 | £ | 0,5102 | £ | 0,5155 | ||||||||
| 1 month ahead | $ | 1.9700 | $ | 1.9500 | £ | 0,5076 | £ | 0,5128 | ||||||||||
| 3 months ahead | $ | 1.9800 | $ | 1.9600 | £ | 0,5051 | £ | 0,5102 | ||||||||||
| 6 months ahead | $ | 1.9900 | $ | 1.9700 | £ | 0,5025 | £ | 0,5076 | ||||||||||
| 12 months ahead | $ | 2.0000 | $ | 1.9800 | £ | 0,5000 | £ | 0,5051 | ||||||||||
| € | 10.000 | Euro | $ | 1.5600 | $ | 1.5400 | € | 0,6410 | € | 0,6494 | ||||||||
| 1 month ahead | $ | 1.5700 | $ | 1.5500 | € | 0,6369 | € | 0,6452 | ||||||||||
| 3 months ahead | $ | 1.5800 | $ | 1.5600 | € | 0,6329 | € | 0,6410 | ||||||||||
| 6 months ahead | $ | 1.5900 | $ | 1.5700 | € | 0,6289 | € | 0,6369 | ||||||||||
| 12 months ahead | $ | 1.6000 | $ | 1.5800 | € | 0,6250 | € | 0,6329 | ||||||||||
| SFr. | 10.000 | Swiss Frank | $ | 0,9200 | $ | 0,9000 | SFr. | 1.0870 | SFr. | 1.1111 | ||||||||
| 1 month ahead | $ | 0,9400 | $ | 0,9200 | SFr. | 1.0638 | SFr. | 1.0870 | ||||||||||
| 3 months ahead | $ | 0,9600 | $ | 0,9400 | SFr. | 1.0417 | SFr. | 1.0638 | ||||||||||
| 6 months ahead | $ | 0,9800 | $ | 0,9600 | SFr. | 1.0204 | SFr. | 1.0417 | ||||||||||
| 12 months ahead | $ | 1.0000 | $ | 0,9800 | SFr. | 1.0000 | SFr. | 1.0204 | ||||||||||
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To hedge the exchange rate risk the UKbased bicycle importer can use Euro futures contracts as follo... View full answer
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