Hedging payable with a futures contract
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If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with a 125,000 euros future contract?
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Solution Summary
The solution how foreign exchange risk in payment can be hedged with a future contract.
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If your company has a payment of 200 million euros due one year from now, how would you hedge the foreign exchange risk in this payment with a 125,000 euros future contract?
To hedge a foreign exchange exposure, a company assumes a position in the opposite direction of the exposure.
Since the company is short on the cash asset (it has to make the payment) it must go long on the futures
No of contracts to go long on:
Exposure= 200,000,000 euros
Value of one contract= 125,000 euros
Therefore number of ...
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