Calculate net euro gain or loss on its futures position

Assignment Help Financial Management

Reference no: EM131179665

On January 10, Volkswagen agrees to import auto parts worth $8 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $1.3437/€ and the March futures price is $1.3502.

(a) Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract. (note: The size of one unit futures contract is €125,000)

(b) On March 4, the spot rate turns out to be $1.3462/€, while the March futures price is $1.3473/€. Calculate VW’s net euro gain or loss on its futures position. Compare this figure with VW’s gain or loss on its unhedged position.

Reference no: EM131179665

Questions Cloud

What is the market price per share of stock : Say you decide to start a firm and you need $500 million of capital to begin. You sell stock for its par value, a total of one million shares (par value is $200 per share), and sell $300 million of bonds at par value. Assume that the market expects t..

What is the range of possible cost savings : Suppose IBM would like to borrow fixed-rate yen, whereas Korea Development Bank (KDB) would like to borrow floating-rate dollars. IBM can borrow fixed-rate yen at 4.75% or floating-rate dollars at LIBOR + 0.35%. What is the range of possible cost sav..

How much will be in your retirement account : You can afford to deposit $250 each month into your retirement account. For the first 15 years, your employer will match your deposits, but you plan to retire in 40 years. If your account is guaranteed to earn5.7%, compounded monthly, then ... how mu..

Bond spread over comparable maturity treasury bonds : A Corporate bond matures in five years. It has a par value of $1000 and pays a 7% annual coupon. This bond’s spread over comparable maturity Treasury Bonds is 150 basis points. Treasury bond yields are currently 2%, 4% and 6% for 2 year, 5 year and 1..

Calculate net euro gain or loss on its futures position : On January 10, Volkswagen agrees to import auto parts worth $8 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. Calculate the number of futures contracts that VW must buy to offset its dollar exchan..

What is the stock expected rate of return : Green Company's common stock is currently selling at $40.25 per share. The company expects to pay dividends of $2.30 per share next year (D1) and projects dividend growth at a rate of 7%. At this rate, what is the stock's expected rate of return?

How does the equity method distort earnings : How does the equity method distort earnings? Income is recognized even though cash may never be received. Equity earnings are recorded even if the investor cannot exercise influence over the investee’s policies. Equity earnings are only recorded on a..

Break-even analysis ignores fixed costs because fixed costs : Operating leverage means financing a portion of a firm's earnings per share with debt. An increase in financial leverage will increase the absolute value of EPS, everything else equal. Break-even analysis ignores fixed costs because fixed costs do no..

Appropriate version of the dividend discount model : What is the current (actual) very recent price of the firm Costco Wholesale Corporation, and what is your estimate of what you think the stock price should be and what is your beta estimate and how you got it, along with your dividend growth estimate..

User Account

All Pages