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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A bank customer will be going to London in June to purchase £100,000 in new inventory. The current spot and futures exchange rates are as follows: Exchange Rates dollars/pound Period Spot March June September December Rate 1.5342 1.6212 1.6901 1.7549 1.8416 The customer enters into a position in June futures to fully hedge her position. When June arrives, the actual exchange rate is $1.735 per pound. How much did she save? $ (Round your response to the nearest whole number.)
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Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?
It is the year 2021 and Pork Barrels, Inc., is considering construction of a new barrel plant in Spain. The forecasted cash flows in millions of euros are as follows: C0 C1 C2 C3 C4 C5 –95 +25 +35 +38 +42 +40 The spot exchange rate is $1.35 = €1. The interest rate in the United States is 8%, and the euro interest rate is 6%. You can assume that pork barrel production is effectively risk-free. a-1. Calculate the NPV of the euro cash flows from the project. a-2. What is the NPV in dollars? b. What are the dollar cash flows from the project if the company hedges against exchange rate changes?
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