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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 hedge using CME euro futures, each covering EUR 125,000. Which position removes the exposure, and how many contracts are needed (ignoring tailing and basis risk)?

The company should short 40 euro futures contracts. It will receive euros, so it is long the currency and must sell futures to offset. The count is EUR 5,000,000 divided by the EUR 125,000 contract size, which equals 40 contracts.

  1. AShort 40 contractsCorrect
  2. BLong 40 contracts
  3. CShort 20 contracts
  4. DLong 20 contracts

Explanation

The company will receive euros, so it is long euros and must sell euro futures. Number of contracts = 5,000,000 / 125,000 = 40. A long position would double the exposure, and 20 contracts would come from using a wrong contract size.

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