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

A U.S. exporter expects to receive EUR 5,000,000 in three months and wants to lock in the USD value using CME euro futures, each with a contract size of EUR 125,000. Which position hedges the exposure, and how many contracts are needed?

The exporter should short 40 euro futures contracts. It will receive euros and is exposed to a euro decline, so it sells futures. The number 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 625 contracts

Explanation

The exporter will receive euros, so it is long EUR and must sell euro futures. Contracts = 5,000,000 / 125,000 = 40. Long 40 would double the exposure rather than offset it. 20 and 625 use the wrong size arithmetic.

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