In March, a U.S. Company is expecting to receive funds in Euros in June from its European customers of 500 million Euros, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in December. At this time the spot exchange rate Euro is worth $1.109 USD. The CME Group currency future settle rate for a June Euro FX futures contacts is 1 Euro = $1.11875 USD, with each futures contract for 125,000 Euros per contract.
a. What position and how many contracts should the financial manager take to hedge against a fall in the Euro? Explain why. (Hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract; always take a position that will give you a futures gain to offset your spot loss in the event of what you want to hedge.)
b. Suppose later in June, the spot rate for the Euro falls to $0.9981 USD and the futures settle rate has falls to $ 1.00688 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
c. What are the advantages and disadvantages of hedging with FX options on futures contracts instead?

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The Answer of In March, a U.S. Company is expecting to receive funds in Euros in June from its European customers of 500 million Euros, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in December. At this time the spot exchange rate Euro is worth $1.109 USD. The CME Group currency future settle rate for a June Euro FX futures contacts is 1 Euro = $1.11875 USD, with each futures contract for 125,000 Euros per contract.
a. What position and how many contracts should the financial manager take to hedge against a fall in the Euro? Explain why. (Hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract; always take a position that will give you a futures gain to offset your spot loss in the event of what you want to hedge.)
b. Suppose later in June, the spot rate for the Euro falls to $0.9981 USD and the futures settle rate has falls to $ 1.00688 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?
c. What are the advantages and disadvantages of hedging with FX options on futures contracts instead?