Question

1. You have a 4,000,000 Norwegian Krone payable. You decide to hedge with a futures contract. You can buy or sell two 2,000,000 Krone futures contracts at $0.0890/NOK.

A.) Assuming you are unhedged, are you concerned that the spot rate will increase or decrease?

B.) To hedge your exposure, would you buy or sell a futures contract?

C.) Assume the price of the Krone increases to $0.0894/NOK by the time you pay the Krone. Calculate the gain/loss on the futures contracts.

D.) Calculate the amount of just the payable (assuming no futures contracts).

E.) Calculate the net amount you would pay [c + d].

Answer 1

A)	If we remain unhedged,we are concerned about spotrate increasing because it will result in more dollar outflow.
B)	To hedge the exposure we will buy the future contract because we will have more dollar outflow if Norwegian krone appreciates.A future contract provides payoff when actual rate in future is higher future contract rate
C)	Gain/(loss) on futures contract				=	(Actual rate in future-future contract rate)*no.of contracts*krones per contract
					=	($0.0894-$0.0890)*2*2,000,000
					=	($0.0004)*2*2,000,000
					=	$      1,600.00
D)	Amount of just payable				=	Actual spotrate in future*Amount payable in Krone
					=	$0.0894*4,000,000
					=	$ 357,600.00
E)	Net amount payable				=	Amount just payable-Net gain on future contract
					=	$357,600-$1,600
					=	$ 356,000.00
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