A U.S. financial institution needs to pay 125,000 pounds sterling in 90 days. The current spot exchange rate is $1.75 per pound sterling at this time. The manager believes that the dollar is likely to depreciate relative to the British pound over the next several months. The firm decides to hedge with a long futures contract (amount per contract of 62,500 pounds) with a current futures rate of $1.80.
If 90 days later the spot rate is $1.90 per pound, and the futures contract exchange rate is $1.95, what is the net result of the hedge?

Question

Quizplus · Accepted Answer

The Answer is Spot Loss of $18,750 and futures gain of $18,750 and net hedging result of $0
Calculation:
Loss on spot position = 125,000($1.75 - $1.90) = Loss of ($18,750)
Gain on futures = 125,000($1.95 - $1.80) = $18,750
Net Hedging Result = $0

A US Financial Institution Needs to Pay 125,000 Pounds Sterling in in 90