Reference no: EM132730260

On March 15, the US company XYZ agrees to export auto parts worth 10.2 million EUR to Europe. The parts will be delivered by XYZ and paid for by a European company (in euros) on May 31. Since on May 31 XYZ expects to receive 10.2 million euros, it decides to hedge its EUR position by entering into CME futures contracts. Assume that the spot rate on March 15 was USD/EUR 1.3243, and the futures price for the June contract was USD/EUR 1.3118.

a) What should XYZ do to offset exchange risk (i.e. buy or sell and how many contracts)? The size of one EUR futures contract is €125,000.

b) Suppose on May 31, the spot rate turns out to be USD/EUR 1.3281, while the futures price for June contract is USD/EUR 1.3152. Calculate XYZ's net gain/loss on its futures position (indicate whether it's a gain or loss).

c) What would have been the total cash flow for XYZ in US$, if they had not hedged? Did they benefit from hedging?

d) How can you use options to hedge against exchange risk (i.e. buy call or put and how many contracts)? Assume that the contract size is €62,500.