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.

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

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