Determine change in value of the firm eur receivable

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Reference no: EM133273648

Question - All Business Machine Corp. ("ABM") has an order to ship to one of its customers in Germany on Nov. 15, 2010, three months from now. ABM expects to receive 500,000 euros (EUR) then and wants to minimize the uncertainty in exchange rates. The manager of ABM has decided to use the currency futures contract expiring in December to hedge the EUR receivable against the exchange rate fluctuation. The size of EUR futures contract is 125,000 units of the currency per contract. Additionally, the table below summarizes spot prices and the December futures prices observed on Aug. 15 and Nov. 15, respectively:

	Aug. 15th	Nov. 15th
EUR spot price	$1.20	1.02
EUR futures price	$1.24	1.05

Answer questions (a) and (b) below.

A. To find out how many futures contracts needed for ABM to hedge its exchange rate risk, clearly state the following details pertaining to the initiation of the futures position on Aug. 15th:

(i) the direction of the transaction (i.e., buy or sell the futures); (ii) the number of the futures contracts; and iii) the total dollar value of the firms' futures position at the initiation of the position.

B. Determine the (i) change in the value of the firm's EUR receivable (based on the spot prices) and the (ii) profit or loss associated with the firm's futures position on Nov. 15th.

Reference no: EM133273648

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