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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

A US company expects to receive EUR 5,000,000 in three months and wants to lock in the USD value using CME euro FX futures. Each contract is for EUR 125,000. Which position is the appropriate hedge, assuming a perfect match of size?

The company should short 40 euro futures contracts. Receiving euros exposes it to euro depreciation, which short futures offset. The number of contracts is EUR 5,000,000 divided by EUR 125,000 per contract, giving 40. A long position would increase rather than reduce the exposure.

  1. AShort 40 euro futures contractsCorrect
  2. BLong 40 euro futures contracts
  3. CShort 25 euro futures contracts
  4. DLong 25 euro futures contracts

Explanation

A company receiving euros is exposed to a fall in the euro, so it should sell (short) euro futures. Number of contracts = 5,000,000 / 125,000 = 40. Long positions would add to the exposure, and 25 results from a wrong contract size.

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