Question

In: Finance

A German company expects to pay 5 million Australian Dollars (AUD in 3 months. a. Name...

A German company expects to pay 5 million Australian Dollars (AUD in 3 months. a. Name 3 principal methods to do so b. How could the German company hedge its currency risk using futures contracts traded on the Chicago Mercantile Exchange (CME)? What contracts could the company enter into? How many would the company enter into? Buy or sell them?

Solutions

Expert Solution

3 principal methods to hedge the position:

(1) Entering into a FUTURES CONTRACT

(2) BUYING CALL OPTIONS for AUD

(3) Money Market hedge i.e. borrowing in £ and investing in AUD today

EUR/AUD Futures Contract is available on CME and its lot size is 125,000 Euros

Therefore, in order to hedge the position, Company should Sell EUR/AUD Futures Contract

Nunber of contracts to be sold = (AUD to be paid×Spot Rate of EUR/AUD)/Contract Size

= [5,000,000/1.6105(assumption)]/125,000

= 24.84 which is equivalent to 25 contracts

Therefore, Company should SELL 25 Futures Contracts EUR/AUD on CME to hedge its position.

(If this was helpful then please rate positively. Thank You:)

jeff jeffy answered 6 months ago
Next > < Previous

Related Solutions

A U. S. company expects to pay its supplier 1 million British pounds in 3 months...
A U. S. company expects to pay its supplier 1 million British pounds in 3 months and is considering whether to hedge the resulting foreign exchange risk with a futures contract or a forward contract on British pounds with 3 months to the delivery date. The correlation between changes in the spot price of British pounds in terms of U. S. dollars and changes in the U. S. interest rate is 0.85. Taking into account the daily settlement process associated...
An Indonesian lady wishes to convert 1 million Indonesian rupiah (IDR) to Australian dollars (AUD). Exchange...
An Indonesian lady wishes to convert 1 million Indonesian rupiah (IDR) to Australian dollars (AUD). Exchange rates are 13,125 IDR per USD and 0.79 USD per AUD. How many AUD is the IDR 1 million worth? (a) AUD 16,613,924,050.63 (b) AUD 10,368,750,000.00 (c) AUD 10,368.75 (d) AUD 96.44 (e) AUD 60.19
Your company forecasts that 3 months after today you will need to borrow $5 million dollars...
Your company forecasts that 3 months after today you will need to borrow $5 million dollars for 3-months. You also know a Eurodollar futures contract that expires in 3 months (June) is trading at 98.08.   You decide to use this Eurodollar futures contract to hedge your risk.   If the actual LIBOR rate on the day when you borrow money, which is also the day that your Eurodollar futures position expires, is 1.3%. (1) Indicate how you will use the Eurodollar...
1. A U.S. company expects to pay 1 million Euros in six months. How can they...
1. A U.S. company expects to pay 1 million Euros in six months. How can they use forward contracts to hedge against the exchange rate risk? 2. The price of gold is currently $660 per ounce. The forward price for delivery in one year is $700. An arbitrage trader can borrow or lend money at 10% per annum. Identify an arbitrage strategy. 3. A trader owns one unit of gold. The trader can buy gold at $50 per ounce and...
A U.S. company expects to have to pay 10 million Mexican pesos in six months. Explain...
A U.S. company expects to have to pay 10 million Mexican pesos in six months. Explain how the exchange rate risk can be hedged using (a) a forward contract and (b) an option.
Lion Star Inc. will receive 50 million Australian dollars (AUD) tomorrow. Current FX rate = $0.64/Euro....
Lion Star Inc. will receive 50 million Australian dollars (AUD) tomorrow. Current FX rate = $0.64/Euro. Standard deviation of daily percentage change of AUD is 0.76 % over the last 200 days. Assume normal distribution, and the expected % change in Euro is 0.15%. A) What is the maximum one-day loss (in % and in dollar amount) with 99% confidence level? B) What is the maximum one-day loss (in % and in dollar amount) with 95% confidence level?
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call...
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call and put on Russian Ruble are available with a strike price of RR60/$ for each option, and a premium of 1.5% for the call option and a premium of 2% for the put option. The weighted average cost of capital (WACC) for the U.S. Company is 10% and the current spot rate is RR59/$. a) If the company hedges in the option market, which...
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call...
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call and put on Russian Ruble are available with a strike price of RR60/$ for each option, and a premium of 1.5% for the call option and a premium of 2.3% for the put option. The weighted average cost of capital (WACC) for the U.S. Company is 12% and the current spot rate is RR58.30/$. a. If the company hedges in the option market, which...
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call...
A U.S. Company expects to receive 100 million Russian Ruble 3 months from now. A call and put on Russian Ruble are available with a strike price of RR60/$ for each option, and a premium of 1.5% for the call option and a premium of 2.3% for the put option. The weighted average cost of capital (WACC) for the U.S. Company is 12% and the current spot rate is RR58.30/$. a. If the company hedges in the option market, which...
On May 14, 2020, the spot rate for Australian Dollars was 0.7306 USD/ 1 AUD.  The 180-day...
On May 14, 2020, the spot rate for Australian Dollars was 0.7306 USD/ 1 AUD.  The 180-day (6 month) forward rate quoted in the market was for 0.7340 USD/1 AUD and the risk-free rate on 180-day securities was 2.90 percent APR for United States LIBOR and 1.96 percent APR for Australian LIBOR.  (LIBOR rates are widely used as a reference rate for financial instruments.)  Assume that the US is the home country. Are the quotes for AUD above relative to the USD direct...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT