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 5 months ago
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