An international bank in the U.S. expects to receive 10 million Euros for a loan repayment in 60 days and wants to hedge against the Euro falling in value by getting a Euro futures contract. Suppose hypothetically the Euro's value at this time in U.S. dollars is $1.27. A futures contract for two months from now has a contract amount is 125,000 Euros per contact and a futures FX rate of $1.20. Two months later, the spot FX rate for the Euro falls to $1.00, and the futures contract FX rate falls to $1.05.
What type of hedge should be taken, and what is the net hedging result?

Question

Quizplus · Accepted Answer

To hedge against the Euro falling, get a short hedge to sell Euros in the future to make a gain on the futures contract to offset your spot loss. 
Number of Contracts = 10,000,000 Euros / 125,000 Euros per contract = 80 
Spot Loss = 10,000,000 Euros ($1.00 - $1.27) = ($2,700,000) 
Futures Gain = 125,000 x 80 contracts ($1.20 - $1.05) = $1,500,000 
Net Hedging Result = ($2,700,000) - $1,500,000 = ($1,200,000)

An International Bank in the U