Question: In early April, a U.S. Company is expecting to receive 1,250,000 Euros in June from its European customers, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in June.
At this time the spot exchange rate Euro is $1.086 USD. The CME Group future settle rate for June Euro FX futures contacts is 1 Euro = $1.091 USD, with each futures contract for 125,000 Euros per contract.
a. What position and how many contracts should the financial manager take for the hedge? Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract),
Type of Position _____________ Why this Position_____________
Number of Contracts_______________________________
b. Suppose in June the spot rate for the Euro rises instead to $1.1946 USD and Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
Spot Gain or Loss ____________ Futures Gain or Loss ___________
Net Hedging Result _____________ (Futures Gain or Loss - Spot Gain or Loss)
c. Would the U.S. Company have done better getting options on the Euro futures contract instead for this hedge? Explain why or why not.