A U.S.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. How many currency contracts are necessary to hedge this asset?

Question

Quizplus · Accepted Answer

To hedge the €10,000,000 loan, divide the loan amount by the contract size (10,000,000 / 125,000 = 80 contracts). Then, apply the hedge ratio: 80 contracts * 1.40 = 112 contracts.

A USFI Wishes to Hedge a €10,000,000 Loan Using Euro Currency