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Establish a hedge for the currency exposure

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A UK company purchased goods for €870,000 in December, which it must pay for in May. It wishes to hedge its exposure to risk using futures. The spot rate when the goods were purchased is £0.7161/€. The price of euro June futures at the same time is £0.7180/€. Euro futures are for €100,000, they are priced in £ per €1 and the size of a tick is £0.0001and the value of a tick is £10.

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How might the company use currency futures to establish a hedge for the currency exposure?

Having established the hedge, suppose the spot rate when the goods are paid is £0.7215/€ - £0.7220/€, and the price of the June is futures £0.7213/€. How would the position be unwound and what would be the effective exchange rate for the payment in euro?

Reference no: EM133115591

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