On january 10 vw agrees to import auto parts worth 7, Ask an Expert

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On January 10, VW agrees to import auto parts worth $7 million from the US. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar exposure by entering into CME futures contracts. On Chicago Board each euro futures comes with a notional of €125,000 per contract. Only integral number of contracts can be bought or sold. The spot exchange rate on January 10 is €1.1177/$, and the March futures price is €1.1109/$. On March 4, futures close at €1.1151/$, while the realized spot rate is €1.1171/$.

What will be VW’s total cost of payables in Euros under the following three scenarios?

1. Remain unhinged.

2. Hedging through CME Euro- futures. Specify number of euro futures contracts. Also specify whether long or short?

3. If the hedged position is closed on March 4 and dollars are bought in spot market.

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M91557387

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