You have a purchase order to acquire €1 million of heavy equipment from a French company...

You have a purchase order to acquire €1 million of heavy equipment from a French company to be paid in full at time of delivery in March 2021. Describe in detail how you would hedge this transaction. Quantify the number of contracts.

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Expert Solution

You have to buy € by paying $ in 1 year. Therefore, you should hedge against a rise in the $/€ exchange rate.

This would be hedged by selling March 2021 futures on the €.

The contract specifications are below :

contract size = €125,000 per contract

March 2021 futures price = $1.1036

Number of contracts to sell = total € to pay / contract size

Number of contracts to sell = €1,000,000 / €125,000

Number of contracts to sell = 8

In March 2021, the futures contract would be squared off and the €1,000,000 would be paid for the at the spot exchange rate.

jeff jeffy answered 1 year ago

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