Decide to hedge your exposure using futures contracts

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Reference no: EM131974508

You recently sold some goods to an importer in Switzerland and, during the negotiations, you agreed to invoice the goods in francs, knowing that you will need to convert the francs to dollars upon receipt. The current exchange rate is $.60 per franc, and the invoice will be for 250,000 francs. Payment is due in 60 days. You decide to hedge your exposure using futures contracts.

a. How many futures contracts will you need?

b. Will you create a buy hedge or a sell hedge?

c. What will your spot market position be if the spot exchange rate is $.70 in 60 days?

d. What will your futures contract gain or loss be if the futures rate, which is currently $.63, increases to $.71?

e. Assume that one futures contract has a commission rate of $25 and the margin is $1,000 per contract. The current money market interest rate is 7%. What is the net position resulting from the hedge, and how does the hedged position compare with an unhedged position?

Reference no: EM131974508

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