In October, a U.S. Company is expecting to pay funds in British Pounds in June to its British suppliers of 625 million British Pounds, and wants to hedge against a rise in the value of the British Pound relative to the U.S. dollar in December. At this time the spot exchange rate British Pound is worth $1.25 USD. The CME Group currency future settle rate for a December British Pound FX futures contacts is 1 British Pound = $1.2470 USD, with each futures contract for 62,500 British Pounds per contract.
a. What position and how many contracts should the financial manager take to hedge against a rise in the British Pound? Explain why. (Hint # contracts = Amount of British Pounds Hedged / 62,500 British Pounds 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 December the spot rate for the British Pound rises to $1.375 USD and the futures settle rate rises to $1.3717. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?

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The Answer of In October, a U.S. Company is expecting to pay funds in British Pounds in June to its British suppliers of 625 million British Pounds, and wants to hedge against a rise in the value of the British Pound relative to the U.S. dollar in December. At this time the spot exchange rate British Pound is worth $1.25 USD. The CME Group currency future settle rate for a December British Pound FX futures contacts is 1 British Pound = $1.2470 USD, with each futures contract for 62,500 British Pounds per contract.
a. What position and how many contracts should the financial manager take to hedge against a rise in the British Pound? Explain why. (Hint # contracts = Amount of British Pounds Hedged / 62,500 British Pounds 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 December the spot rate for the British Pound rises to $1.375 USD and the futures settle rate rises to $1.3717. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result?