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Hedging - selecting the correct futures hedge

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1. You are a US company with a customer that is going to pay you 10,000 Euros in 6 months. The correct futures hedge for this situation is to enter into a contract in which you buy Euros (True or False)

2. You are a US company that needs to pay a vendor 10,000 Euros 6 months from now. One option to hedge against foreign currency exchange risk might be to purchase Euros now (True or False).

3. You are a US company that needs to pay a vendor 10,000 in Euros 6 months from now. One option to hedge against foreign exchange risk might be to enter into the sell Euros via a futures contract (true or false)

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Solution Preview

1. You are a US company with a customer that is going to pay you 10,000 Euros in 6 months. The correct futures hedge for this situation is to enter into a contract in which you buy Euros (True or False)
Answer: False
I will receive 10,000 Euro at the end of 6 months, so I would be selling them. So I should enter into a contract to sell Euro. I can sell them now in futures market and can reduce the risk of depreciation of ...

Solution Summary

This posting shows the correct futures hedge under three different situations to enter into a contract in which you buy Euros.

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