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For the most part, the price of oil is denominated in dollars. Assume you are a French firm that expects to import 42,000 barrels of crude oil in six months. What risks do you face in this transaction? Explain how you could construct to hedge to offset the currency portion of those risks.

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This solution helps go through how to hedge the currency risk within the context of foreign exchange rates.

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The risks you face are change in price of oil and change in exchange rate.

Consider this, you plan to buy 42000 barrels, the current price of oil is $100/barrel and exchange rate is 1.5 USD for 1 EURO. You have set aside enough money now so you can purchase 42000 barrels at the present price and exchange rate. ...

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