An FI has a 1-year 8-percent US $160 million loan financed with a 1-year 7-percent UK ≤100 million CD. The current exchange rate is $1.60/≤.
-What should be the trading price of the BP futures contract at the end of the year in order for the FI to be perfectly hedged? That is, the FI earns its original anticipated spread without any effects of exchange rate changes?

Question

Quizplus · Accepted Answer

The FI has a net receivable of $60 million (160-100). At the current exchange rate, this is equivalent to ≤37.5 million (60/1.60). To be perfectly hedged, the FI needs to sell ≤37.5 million worth of BP futures at the end of the year. The trading price of the BP futures contract should be $1.61/≤ (37.5/23.3125) in order for the FI to earn its original anticipated spread without any effects of exchange rate changes.

An FI Has a 1-Year 8-Percent US $160 Million Loan