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

25. 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. Gain of $10,000 c. Gain of $12,000 d. Loss of $9,000

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Expert Solution

The firm is importing Mexican caviar. Therefore it will have a Pesos 2 million payable on July 15. It is afraid of Pesos appreciating against dollar. To hedge against the same it will but futures on Pesos.
September future price on June 15 is at $0.0665 per peso. So the US firm should buy futures at this price.

September future price on July 15 is 0.0615 per peso. So it will sell the September futures and will net off the position.
Loss on futures = (September future price on July 15 - September future price on June 15) * 2 million
                                = (0.0615 – 0.0665) * 2 million
                                = -0.005 * 2 million
                                = $10000

The loss from the future hedge will be $10000. Option a is correct.

jeff jeffy answered 1 year ago
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