A European company plans to purchase raw materials from the United States for its manufacturing operations. The company requires 5,000 units of a specific raw material per month for the next three months. It's cur- rently November 1, 2021, and the company is concerned about potential price fluctuations in the USD/EUR exchange rate. The current exchange rate is $1.20 per EUR. The company is considering using futures contracts to hedge its currency risk. The futures contracts available for these months have the following prices: Dec 2021 $ 1.18 per S Jan 2022 S 1.16 per S Feb 2022 $1.14 per S Assume each futures contract covers e1,000. 1) Should the company hedge its currency risk using futures contracts? 2) If the company decides to hedge, how many futures contracts should it enter into for each of the next three months?

A European company plans to purchase raw materials from the United States for its manufacturing operations. The company requires 5,000 units of a specific raw material per month for the next three months. It's cur- rently November 1, 2021, and the company is concerned about potential price fluctuations in the USD/EUR exchange rate. The current exchange rate is $1.20 per EUR. The company is considering using futures contracts to hedge its currency risk. The futures contracts available for these months have the following prices: Dec 2021 $ 1.18 per S Jan 2022 S 1.16 per S Feb 2022 $1.14 per S Assume each futures contract covers e1,000. 1) Should the company hedge its currency risk using futures contracts? 2) If the company decides to hedge, how many futures contracts should it enter into for each of the next three months?

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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