A Canadian FI wishes to hedge a €10,000,000 loan using euro currency futures. Each euro futures contract is for 125,000 euros, and the hedge ratio is 1.40. The loan is payable in one year in euros. What type of currency hedge is necessary to protect the FI from exchange rate risk?

Question

Quizplus · Accepted Answer

The FI should sell € currency futures to hedge against the risk of the euro depreciating against the Canadian dollar, which would result in receiving fewer Canadian dollars when the loan is repaid in euros.

A Canadian FI Wishes to Hedge a €10,000,000 Loan Using