Question

On July 1, an American auto dealer enters into a contract to purchase 20 British sports cars with payment to be made in pounds on November 1. Each car costs 35,000 pounds. The dealer is concerned that the pound will strengthen over the next few months. The dealer plans to trade in December pound futures contracts. The December pound futures price is $1.278 per pound. Each contract is for delivery of 62,500 pounds. How many contracts should the auto dealer trade in?

NEED HELP WITH THSI QUESTION!! WITH EXPLANATIONS

Answer 1

Given,

No. of British sports car = 20

Cost of each car = 35000 pounds

Solution :-

No. of Pounds committed to purchase = 20 british Sports cars x 35000 pounds - 700000 pounds Pound future price & $1.278 per pound Delivery of pounds a la 62500 pounds per contract Now, Optimal no. of contracts - No. of Pounds Committed to purchase & Pound future Delivery of pounds per contract - - 700000 62500 x $1.278 = 14 contracts should So, the trade in eut 14 auto dealer contracts.