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Imperial Tasty Treats is a British food firm that has just signed a contract to sell haggis to a US firm. The firm will receive $250,000 in March and is

Imperial Tasty Treats is a British food firm that has just signed a contract to sell haggis to a US firm. The firm will receive $250,000 in March and is considering hedging this exposure with futures contracts. The subsequent table shows the spot and futures rates for February and March:

a. Design and describe a futures-based hedging strategy for Imperial Tasty Treats.

b. What would be the final cash flows of the previously described hedging strategy?

Expert Solution

a.

The firm will received euros, and needs to sell the euros after the payment is received. The base currency of the futures contract is euros. Hence, the firm will sell the futures to hedge its receivables.

b.

Number of futures contract to sell = amount receivable in euros / size of each futures contract

Number of futures contract to sell = 250,000 / 125,000

= 2.

Net amount received in $ = number of futures contracts sold * contract size * future rate

Net amount received in $ = 2 * 125,000 * 1.23

Net amount received in $ = $307,500

The final cash flow is $307,500.

a. The firm will received euros, and needs to sell the euros after the payment is received.

b. The final cash flow is $307,500.

Junaid answered 1 year ago

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