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.How many currency contracts are necessary to hedge this asset?
A)112 bought euro currency futures contracts
B)112 sold euro currency futures contracts
C)80 bought euro currency futures contracts
D)80 sold euro currency futures contracts

Question

Quizplus · Accepted Answer

DTo hedge a €10,000,000 loan using euro currency futures, where each contract is for €125,000 and the hedge ratio is 1.40, the number of contracts needed is calculated as follows: (€10,000,000 / €125,000) * 1.40 = 112 contracts. Since the loan is payable in euros, the FI would want to sell euro futures to hedge against the euro depreciating. Therefore, options B and D are correct, but since the question specifies it's a hedge (implying protection against adverse movements), the most appropriate action is to sell futures contracts, making option B the most accurate choice in the context of hedging.

A US FI Wishes to Hedge a €10 000 000