Question

4. You have a 6,000,000 Norwegian Krone receivable. You decide to hedge with a futures contract. You can buy or sell three 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 receive the Krone. Calculate the gain/loss on the futures contracts.

d.) Calculate the amount of just the receivable (assuming no futures contracts).

e.) Calculate the net amount you would receive [c + d].

Answer 1

a]

You are concerned that the spot rate will decrease.

This is because if the spot rate decreases, the amount of dollars received for each NOK will be lower

b]

To hedge your exposure, you would sell a futures contract.

This is because if the spot rate decreases, the gains on the future contract will offset the loss due to the decrease in the spot rate. Alternatively, by selling the futures contract, the price at which NOK is converted into USD is locked in

c]

As it is a short position, a rise in the price will result in a loss.

Loss on futures contract = (spot price at maturity - contract sale price) * total amount of NOK hedged

Loss on futures contract = ($0.0894 - $0.0890) * 6,000,000

Loss on futures contract = $2,400

d]

Amount of receivable = spot price at maturity * total amount of NOK receivable

Amount of receivable = $0.0894 * 6,000,000

Amount of receivable = $536,400

e]

Net amount = Amount of receivable - Loss on futures contract

Net amount = $536,400 - $2,400

Net amount = $534,000