A US FI wishes to hedge a €10 000 000 loan using euro currency futures.Each euro futures contract is for €125 000, 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?
A)Buy euro currency futures.
B)Sell euro currency futures.
C)Finance the loan with Eurodollar deposits.
D)Either sell euro currency futures or finance the loan with Eurodollar deposits.

Question

Quizplus · Accepted Answer

To hedge against the risk of the euro depreciating against the dollar, the US FI would sell euro currency futures. This way, if the euro's value decreases, the FI can buy euros at a lower price in the future to repay the loan, offsetting the loss in exchange rate with gains from the futures contract.

A US FI Wishes to Hedge a €10 000 000