How should the company hedge its position

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Reference no: EM132004627

Suppose a company will receive US$2, 000, 000 in three months and they wish to hedge the foreign exchange rate risk associated with this payment.

The spot exchange rate is $1 = euro 0.70.

They estimate that if the US dollar falls by euro 0.10 (i.e. to $1 = euro 0.60) then the company will lose euro 200, 000 on the transaction.

i) If the current three month futures price is $1 = euro 0.78 and dollar futures contracts are for $100, 000 each, how should the company hedge its position?

ii) Demonstrate that the hedge is perfect by illustrating net payoff for a euro 0.10 fluctuation in exchange rates from current spot prices.

Reference no: EM132004627

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