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How can hedge the exposure using currency futures

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Reference no: EM132950055

The following information is available on the expected $/¥ exchange
rates to prevail at the end of the year. Your company hired a company in China to produce attic trapdoors for export back to the US. The export price of the trapdoors is adjusted with the dollar/yuan rates and is shown below for four exchange rates. You are expected to pay for the goods at the local price.

Qi (Prob)                Si            Local Price (P'i)                   Pi (price in dollars)

0.25                   $0.10               ¥2000                            $200.00
0.25                   $0.11               ¥1750                             $192.50
0.25                  $0.12                 ¥1500                               $180.00
0.25                   $0.13                 ¥1250                               $162.50

Problem a. Estimate β, or the relationship between $/¥ rates and trapdoor prices in US dollars.

Problem b. You plan to pay for the trapdoors at the end of the year. Explain how you can hedge the above exposure using currency futures. The one- year forward rate is $0.12/¥. Show the example for one trapdoor.

Reference no: EM132950055

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