Question

On March 3rd, Ford agrees to import auto parts worth 10.5 million euros from Germany. The...

On March 3rd, Ford agrees to import auto parts worth 10.5 million euros from Germany. The parts will be delivered Sept. 5th and are payable immediately in euros. Ford decides to hedge its euro position by entering into IMM futures contracts. The euro futures contract is for 125,000 euros and goes into delivery on Sept. 17th. The March 3rd spot rate is $0.545/euro, and the March 3rd September futures price is $0.555/euro. On Sept. 5th, the spot rate turns out to be $0.557, while the Sept. futures price is $0.5565. How many futures contracts does Ford need to hedge its exchange-rate risk and should it buy or sell futures contracts on March 3rd?

84 contracts, buy 52 contracts, sell 84 contracts, sell 52 contracts, buy

Homework Answers

Answer #1

Number of futures to hedge the risk = amount payable / size of each futures contract

Number of futures to hedge the risk = 10.5 million / 125,000 ==> 84 contracts

The payable amount is in Euros. So, dollars need to be exchanged into Euros on Sept. 5th. That is, Ford will sell dollars and buy euros. the futures contracts are based in euros (dollars per euro). hence to hedge the currency risk, Ford should buy the futures contract. The futures contract would make a profit if the exchange rate of dollars per Euro rises, and make a loss if the exchange rate of dollars per Euro falls. The profit or loss from futures contract would offset the change in spot exchange rate.

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
On January 10, Volkswagen agrees to import auto parts worth $7 million from the US. The...
On January 10, Volkswagen 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 position by entering into IMM futures contracts. The spot rate is $1.3447/ euros and the March futures prices is $1.3502. Calculate the number of futures contracts that VW must buy or sell to offset its dollar exchange risk on the parts contract if each contract...
On January 10 Volkswagen agrees to import auto parts worth $7 million from the US. The...
On January 10 Volkswagen 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 position by entering into IMM futures contracts. The spot rate is $1.3447/ Euros and the March futures price is $1.3502/ Euros. On March 4, the spot turns out to be $1.3452/ Euros, while the March the futures price is $1.3468/ Euros. Calculate VW's net euro...
On January 10, Volkswagen agrees to import auto parts worth $7 million from the U.S. The...
On January 10, Volkswagen agrees to import auto parts worth $7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $1.3447/€ and the March futures price is $1.3502. On March 4, the spot rate turns out to be $1.3452/€, while the March futures price is $1.3468/€. Calculate VW’s net euro gain or loss on...
Please no excel usage A Canadian company with operations in Germany expects to purchase 20 million...
Please no excel usage A Canadian company with operations in Germany expects to purchase 20 million euros worth of raw materials in three months. The company is considering using a three month forward contract on 20 million euros to mitigate exchange rate risk. The forward rate is C$1.25/euro. Assume that the spot rate at expiration is C$1.30/euro. What should the company do to hedge its exchange rate risk? A) Wait three months and buy 20 million euros in the foreign...