Question

. Suppose that your firm, based in the U.S. with assets in $US, signs a contract to buy a custom-made airplane from a French aircraft manufacturer. The contract price is 100 million euros with delivery of the plane in exactly one year, when you will have to make the payment in full. The interest rate at which you can borrow or lend euros is 6 percent and the interest rate that you can borrow or lend U.S. dollars is 4 percent. The current spot rate is .8333 euros per dollar ($1.2 per euro). There is a one-year futures contract for euros with a price, expressed as dollars per euro, of $1.25 per euro (.8 euros per dollar) and a contract size of 1 million euros. What risk does the firm face? How would you use the futures market to hedge that risk? Is the futures market the best way to hedge this risk in this case? Assume there are no options. Explain your reasoning

Answer 1