Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data. Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Question

Your firm is a U.K.-based exporter of British bicycles.You have sold an order to an Italian firm for €1,000,000 worth of bicycles.Payment from the Italian firm (in €)is due in twelve months.Your firm wants to hedge the receivable into pounds.Not dollars.Use the following table for exchange rate data.  Detail a strategy using futures contracts that will hedge your exchange rate risk.Have an estimate of how many contracts of what type.

Quizplus · Accepted Answer

Selling €1m forward using 16 contracts at the forward rate of $1.29 per €1 hedges the exchange rate risk by locking in the rate at which the euro will be converted to dollars. Buying £750,000 forward using 12 contracts at the forward rate of $1.72 per £1 hedges the dollar to pound conversion risk. This strategy fully hedges the receivable into pounds at a known rate, providing certainty for the future cash flow.

Your Firm Is a U