Question

In: Finance

On June 15, a US firm is planning to import Mexican caviar worth Pesos 2 million...

On June 15, a US firm is planning to import Mexican caviar worth Pesos 2 million due on July 15 (one month later). The firm decides to hedge its payables position by using September peso futures. The spot rate on June 15 is US$ 0.0630 / peso and the September futures price on June 15 is at $0.0665 per peso. One month late on July 15, the spot rate is $0.0570 / peso while the September futures price is $0.0615 / peso. Assume contract size is 2 million pesos.

What is the gain or loss from the futures hedge:

a.

Loss of $10,000

b.

Loss of $9,000

c.

Gain of $10,000

d.

Gain of $12,000

Solutions

Expert Solution

Ans) for calculating profits and losses on a futures contract we need

Tick size ( determines how much the contract has been impacted by the change in the dollar value of futures price)

Original futures price (on june 15)

Changed futures price (on July 15)

So, standard tick size is .01 and tick size for the contract stated in the question will be

=tick size* the value of the contract

= .01 * 20,00,000 = 20,000 is the value of one tick move of the contract

Now, since the US firm hedges against the rise in prices of pesos, a fall in the futures price of the contract would result in a loss as entering the contract in june would bind the firm to purchase pesos at $ 0.0665/ peso rather than $ 0.0615/ peso had the contract been purchased in July for the September futures.

Now, amount of loss on the contract = value of one tick move of the contract * no. of ticks moved

where, number of ticks moved= change in the price from june to July / standard tick size

= (0.0665 - 0.615) / .01 = 0.5

therefore

loss on the contract = value of one tick move i.e. 20000 * no. of ticks moves i.e. 0.5

= 20000* 0.5 = 10000

therefore, correct option a) loss of 10000


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