What is the gain in the futures market

Reference no: EM133486760

Case: Suppose you are working for a company that does business with Australia. Your company has closed a deal where you will provide consulting services to the Australian firm and they will pay you a sum of 400,000 AUD in January 2024. Your boss asks you to hedge to exchange rate risk that you face.

The CME AUD contract has a contract size of 100,000 AUD. The current exchange rate is 0.70 $/AUD and the current price of a March 2024 futures contract is 0.68 $/AUD.

In January 2024 when you lift your hedge, the spot exchange rate moved to 0.67 $/AUD and the March 2024 futures price is 0.667 $/AUD.

Assume transaction fees of $15 per roundtrip per futures contract and a hedge ratio of 1.0 when answering the questions below. Round to the nearest whole number of contracts.

Question 1: Did you first go long or short futures to initiate your hedge?

Question 2: How many futures contracts do you trade for your hedge?

Question 3: What is the gain (loss) in the futures market (after accounting for transaction fees of $15 per roundtrip)? Enter your answer without dollar signs or commas. For a profit, enter a positive number. For a loss, enter a negative number.

Question 4: What is the net outcome of the hedge in terms of $/AUD? Do not enter dollar signs or commas. Please enter your answer significant to FIVE decimal places. For example, if you believe the net outcome is an exchange rate of $0.21120/AUD, simply enter "0.21120"

Reference no: EM133486760

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