One company in the US knows that it will have to pay 30 million euros in...
One company in the US knows that it will have to pay 30 million euros in three months. The current exchange rate is $ 1.08 per euro. a. At what risk is the company exposed? b. Explain how she could use forward contracts to hedge her report. c. Explain how she could use Futures to offset her report. d. If it had decided to hedge its position on forward contracts, when would it have made a profit and when had it lost? e. What are the similarities and differences between these two hedging strategies?
Homework Answers
a]
The company is exposed to currency risk. It is exposed to the risk of the dollar depreciating against the euro.
b]
She could buy a 3-month forward contract on the euro to hedge her risk. If the dollar depreciates against the euro, the higher dollar payment will be offset by the gains from the forward contract, thus hedging her risk.
c]
She could buy a 3-month futures contract on the euro to hedge her risk. If the dollar depreciates against the euro, the higher dollar payment will be offset by the gains from the futures contract, thus hedging her risk.
d]
It would have made a profit if the exchange rate in 3 months is above $1.08 per euro.
It would have made a loss if the exchange rate in 3 months is below $1.08 per euro.
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