Question

# US importer will purchase 500 Italian sport cars on the 15th of FEB, APR, JUL and...

US importer will purchase 500 Italian sport cars on the 15th of FEB, APR, JUL and OCT of 2014. The price is fixed at EUR40,000/car. 4.1 What is the risk born by the US importer? 4.2 In a time table, using notations, describe how to open a strip hedge based on 0.8 hedge ratio, given that one EUR futures is for the delivery of EUR125,000.

 Date Qty*Price Amount Hedge Ratio Hedged Value Future Strips 15 February 2014 500*40000 = 200,00,000.00 0.8 200,00,000*0.8 = 160,00,000 160,00,000/125,000 = 128 15 April 2014 500*40000 = 200,00,000.00 0.8 200,00,000*0.8 = 160,00,000 160,00,000/125,000 = 128 15 July 2014 500*40000 = 200,00,000.00 0.8 200,00,000*0.8 = 160,00,000 160,00,000/125,000 = 128 15 October 2014 500*40000 = 200,00,000.00 0.8 200,00,000*0.8 = 160,00,000 160,00,000/125,000 = 128
 As the price per car is fixed at EUR 40,000/- US importer has fx rate risk. Suppose if EUR appreciates compared to USD then importer has to pay more USDs to its counterparty. For example at the time of purchase EUR to USF is 1.1 i.e you have to pay 1.1 USD for exchange of 1 EURO so you would be end up paying 40,000*1.1=44,000 USD But, If EUR Appreciates and EUR to USD exchange rate changes to 1.2 then importer would end up paying more USD i.e. 40,000*1.2=48,000 USD Hence to avoid paying more because of currency fluctuations importer needs to hedge his position.