A California wine company is committed to selling €3,400,000 of inventory in December 2020 to a...

A California wine company is committed to selling €3,400,000 of inventory in December 2020 to a customer based in Amsterdam. The US Company wants to protect itself against a decline in profit that would result from foreign exchange. The current futures price is $1.1220, how would it hedge?

Sketch out the cash flows of the hedged position (in US$) assuming the following scenarios. A. St = F0 B. St = F0 - $0.12 C. St = F0 + $0.12

Expert Solution

The US Company wants to protect itself against a decline in profit that would result from foreign exchange. Therefore it should sell the € futures contracts.

Cash flow from hedged position = profit on futures contracts + cash flow from spot market

profit on futures contracts = (current futures price - spot price at maturity) * number of €

cash flow from spot market = spot price at maturity * number of €

jeff jeffy answered 1 year ago

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