Hedging decision
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1. In March, a U.S. financial institution manager is expecting to receive 10 million in Euros in June on a loan, and wants to hedge against a fall in the value of the Euro when she needs to convert the Euros to U.S. dollars in June. On this date, spot exchange rate of one Euro = $1.3085 (U.S. dollars). The CME currency future settle rate for Euro currency futures contacts is for 1 Euro= $ 1.3070 (U.S. dollars), with the minimum contract of 125,000 Euros.
a. What position and how many contracts should the financial manager take to hedge against a fall in the Euro?
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Solution Summary
The solution explains the hedging decision to hedge against a fall in the Euro. The position and financial managers are determined.
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Number of contracts = 10,000,000/125,000 = 80 contracts
The finance ...
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