Futures contracts

L2 – Q96 – Futures and hedging with futures

US company hedges £400,000 sterling receipt using currency futures, calculating effective exchange rate.

Question

MORE CURRENCY FUTURES
The sterling/US dollar currency future is a contract for £62,500. It is priced in US dollars, and the tick size is $0.0001.
Currency futures are not normally used by companies to hedge currency risks. However, assume that a US company, Apex Innovations Ltd, intends to use currency futures to hedge the following currency exposure.
It is now October. Apex Innovations Ltd expects to receive £400,000 in January from a customer in the UK.
The price of March sterling/US dollar futures is currently 1.8600.
The company is concerned that the value of sterling will fall in the next few months, and it therefore decides to use futures to hedge the exposure to currency risk.

Required
(a) How should Apex Innovations Ltd hedge its currency risk with futures?
(b) Suppose that in January when Apex Innovations Ltd receives the sterling payment, the March futures price is 1.8420 and the spot rate (US$/£1) is 1.8450.
Show what will happen when the futures position is closed, and calculate the effective exchange rate that Apex Innovations Ltd has obtained for the £400,000.

Answer

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Tags: Currency futures, Exchange Rates, Financial Risk Management, Foreign Exchange Risk, Futures contracts, Hedging, Risk Mitigation, Sterling, US Dollar
Level: Level 2

Topic: Futures and hedging with futures

FM – L2 – Q94 – Futures and hedging with futures

Explain how a Canadian company can hedge USD payment using euro/USD futures.

Question

The euro/US dollar currency future is a contract for €125,000. It is priced in US dollars, and the tick size is $0.0001.

Currency futures are not normally used by companies to hedge currency risks. However, assume that a Canadian company intends to use currency futures to hedge the following currency exposure.

It is now February. The Canadian company has to make a payment of US $640,000 in May to a supplier.

The price of June euro/US dollar futures is currently 1.2800.

The company is concerned that the value of the dollar will increase in the next few months, and it therefore decides to use futures to hedge the exposure to currency risk.

Required

(a) How should the company hedge its currency risk with futures?

(b) Suppose that in May when the company must make the payment in dollars, the June futures price is 1.2690 and the spot rate (US$/€1) is 1.2710.

Show what will happen when the futures position is closed, and calculate the effective exchange rate that the company has obtained for the US $640,000

Answer

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Tags: Basis risk, Currency futures, Effective Exchange Rate, Foreign Exchange Risk, Futures contracts, Hedging
Level: Level 2

Topic: Futures and hedging with futures

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

Question

AB Enterprises, a company whose domestic currency is the cedi, has imported a consignment of tomato paste from Spain at a cost of EUR540,000, which is payable in three months’ time. Ama Kofi, the company’s finance director, is concerned about the company’s exposure to currency risk, and she is considering the use of forward contracts or currency futures to hedge the risk.

Required:
(i) Explain to Ama Kofi FOUR differences between a forward contract and a futures contract.
(ii) Currency risk exposure may be transaction risk, economic risk, or translation risk. Which of the three kinds of currency risk exposure is AB Enterprises facing in relation to the EUR540,000 tomato paste consignment?
(iii) Explain to Ama Kofi, THREE disadvantages of hedging the euro exposure with futures hedge.

Answer

Find Related Questions by Tags, levels, etc.

Tags: Basis risk, Currency Risk, Financial instruments, Forward contracts, Futures contracts, Futures hedging, Hedging, Transaction risk
Level: Level 2

Topic: Futures and hedging with futures

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L2 – Q96 – Futures and hedging with futures

US company hedges £400,000 sterling receipt using currency futures, calculating effective exchange rate.

FM – L2 – Q94 – Futures and hedging with futures

Explain how a Canadian company can hedge USD payment using euro/USD futures.

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

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L2 – Q96 – Futures and hedging with futures

US company hedges £400,000 sterling receipt using currency futures, calculating effective exchange rate.

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FM – L2 – Q94 – Futures and hedging with futures

Explain how a Canadian company can hedge USD payment using euro/USD futures.

You're reporting an error for "FM – L2 – Q94 – Futures and hedging with futures"

FM – L2 – Q87 – Foreign exchange risk and currency risk management

Explain four differences between forward and futures contracts for AB Enterprises.

You're reporting an error for "FM – L2 – Q87 – Foreign exchange risk and currency risk management"

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