ACCA Applied Skills · Financial Management · Hedging techniques for foreign currency risk
A US company must pay €2,500,000 in three months' time and wishes to hedge using euro currency futures with a standard contract size of €125,000. What position should it take?
The company should buy 20 euro futures contracts. The €2,500,000 payment divided by the €125,000 contract size gives 20 contracts, and it must buy futures because it needs to buy euros and loses if the euro strengthens.
- ASell 20 contracts
- BBuy 20 contractsCorrect
- CBuy 2 contracts
- DSell 2 contracts
Explanation
Number of contracts = €2,500,000 / €125,000 = 20. The company will need to buy euros, and so is exposed to the euro strengthening. Buying euro futures gives a gain if the euro rises, which offsets the higher cost. Selling would increase the exposure.
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