(a) Hedgers and Speculators have a symbiotic relationship. Explain what this means. The treasurer of a UK company, UVW has to pay $625,000 into a Eurodollar account in one month's time. The CME Sterling Currency Futures (STG) expiring in a month's time is currently priced at $1.25. The treasurer takes a hedged position by selling the STG futures and holding them to expiry. (b) How many contracts does she sell? The futures expire at the EDSP of $1.28. Compare in sterling the cost for the company in paying the $625,000 debt in her hedged versus unhedged position. (c) Comment on the decision to hedge.

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
icon
Related questions
Question

need help on practice question about hedging

please do not use ai as it answers incorrect

(a) Hedgers and Speculators have a symbiotic relationship. Explain what this means.
The treasurer of a UK company, UVW has to pay $625,000 into a Eurodollar account
in one month's time. The CME Sterling Currency Futures (STG) expiring in a
month's time is currently priced at $1.25. The treasurer takes a hedged position by
selling the STG futures and holding them to expiry.
(b) How many contracts does she sell? The futures expire at the EDSP of $1.28.
Compare in sterling the cost for the company in paying the $625,000 debt in her
hedged versus unhedged position.
(c) Comment on the decision to hedge.
Transcribed Image Text:(a) Hedgers and Speculators have a symbiotic relationship. Explain what this means. The treasurer of a UK company, UVW has to pay $625,000 into a Eurodollar account in one month's time. The CME Sterling Currency Futures (STG) expiring in a month's time is currently priced at $1.25. The treasurer takes a hedged position by selling the STG futures and holding them to expiry. (b) How many contracts does she sell? The futures expire at the EDSP of $1.28. Compare in sterling the cost for the company in paying the $625,000 debt in her hedged versus unhedged position. (c) Comment on the decision to hedge.
Expert Solution
steps

Step by step

Solved in 5 steps with 2 images

Blurred answer
Knowledge Booster
Types of Money Market Instruments
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.
Recommended textbooks for you
Essentials Of Investments
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
FUNDAMENTALS OF CORPORATE FINANCE
FUNDAMENTALS OF CORPORATE FINANCE
Finance
ISBN:
9781260013962
Author:
BREALEY
Publisher:
RENT MCG
Financial Management: Theory & Practice
Financial Management: Theory & Practice
Finance
ISBN:
9781337909730
Author:
Brigham
Publisher:
Cengage
Foundations Of Finance
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education