Question

As a US exporter selling to Europe. You wish to hedge a 1,040,000 Euro to be received in 3 months with futures or forwards. Futures contract sizes for the Euro are 125,000E each.  How many dollars will you receive/pay for the goods if you hedge with futures, forwards, and not hedging? Also, rank them?

                        Now                End

Spot                 1.100-01 $/E   1.300-01 $/E

Futures            1.120   $/E       1.315      $/E

Forwards         1.130-31 $/E

Answer 1

Amount Recievable in 3 Months

1,040,000 EURO

Hedging Using Futures
Lot Size of Futures Contract	125,000 E
Number of Lots Required to Hedge the Recievable	= 1,040,000/ 125,000
	= 8.32
As future Contracts can be Purchased only in whole Number, 8 Contracts has to be Entered into.
Balance of 0.32*125,000E = 40,000 E has to be converted using Spot Rate as on Expiry
Exchange Rate Applicable	1.120 $/E
Amount Received on 8 Contractsafter 3 Months Converted to $	E (8* 125,0000E) * 1.120 $/E
	=$ 1,120,000
Balance, 40,000E *1.300$/E	=$ 52,000
Amount Received after 3 Months Converted to $	=$ 1,120,000 + $ 52,000
	=$ 1,172,000

Hedging Using Forwards
Forward Rate	1.130-31 $/E
Exchange Rate Applicable	1.130 $/E
Amount Received after 3 Months Converted to $	E 1,040,000 * 1.130 $/E
	=$ 1,175,200

No Hedging
Spot at the End of 3 Months	1.300-01 $/E
Amount Recieved will be Converted to $ with the Bid Rate at the time of Expiry
Exchange Rate Applicable	1.300 $/E
Amount Received after 3 Months Converted to $	E 1,040,000 * 1.300 $/E
	=$ 1,352,000

Hedge Strategy	Amount Received	Rank
Hedging Using Futures	$ 1,172,000	III
Hedging Using Forwards	$ 1,175,200	II
No Hedging	$ 1,352,000	I