Question

In early March, 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 was $1.139 USD. The CME Group future settle rate for June Euro FX futures contacts was 1 Euro = $1.119 USD, with each futures contract for 125,000 Euros per contract.

Suppose in June the spot rate for the Euro changes to $1.339 USD and the futures settle rate changes to $1.319 USD. 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)

Answer 1

(a)CALCULATION OF Spot GAIN OR LOSS for the company

Spot exchange Price =$1.139

June spot rate for the Euro = $1.339 USD

Spot Euro increase By 1.339-1.139= $0.20 per Euro

AMT to be Receive =Euro1,250,000

Spot Gain = 1,250,000 X $0.20 =$ 250,000USD.

(b)CALCULATION OF Futures Gain or Loss for the company

Future exchange Price for June =$1.119

June Future rate for the Euro = $1.319

Future Euro increase By 1.319-1.119= $0.20 per Euro

AMT to be Receive =Euro1,250,000

Future Gain = 1,250,000 X $0.20 =$ 250,000USD.

(C)CALCULATION OF NET HEDGING RESULT

Net Hedging = Futures Gain or Loss – Spot Gain or Loss

=250,000- 250,000

Net Hedging =0

(If U.S. Company Purchase option instead of future. they will not loss full amt. The lose would be some premium only.)

Spot Gain or Loss $250,000 Futures Gain or Loss $250,000

Net Hedging Result $0 (Futures Gain or Loss – Spot Gain or Loss)