Complete question:
Your firm is a U.K.-based importer of bicycles. You have placed an order with an Italian firm for €1,000,000 worth of bicycles. Payment (in euro) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type and maturity
A. Go short 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
B. Go long 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.
C.Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
D. Go short 100 12-month euro futures contracts; and long 80 12-month pound futures contracts.E. None of the above
Answer:
Go short 100 , 12-month euro futures contracts; and long 80, 12-month pound futures contracts. Option c is correct.
Explanation:
Buy €1m (a long position) forward using futures contracts, at the 12-month forward rate of $1.60 per €1 pay
$1,600,000 = €1,000,000 ×$1.60/€1.
At the 12-month forward rate of $2/≤this is worth ≤800,000.
Go short pound futures contracts.
so , Go long 100 12-month euro futures contracts; and short 80 12-month pound futures contracts.
