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How many futures contracts would she use to hedge

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Question - Kali is a U.S. investor and has invested in Brazilian Timber denominated in Brazilian Real (BRL). The current value of her Timber portfolio is 500 million BRL. She believes that her Brazilian Timber portfolio will be up 5% in local BRL terms and thus will be worth 525 million BRL in 1 years' time. Would she sell or buy BRL futures to hedge the currency risk? If BRL futures are 100,000 BRL per contract, how many futures contracts would she need? If in one year's time, the value of the Timber is 510 million BRL, is she over-hedged or under-hedged? Ex-post for the combined position (Timber plus BRL futures)? Does she benefit ex-post in mark-to-market terms or not from a move from.

17 USD per BRL to .20 USD per BRL, given she is either over-hedged or under-hedged? Additionally, can she have a liquidity issue if BRL futures went from .17 USD to .20 USD? Explain why.

The questions below are in the original question. They are written for you to clarify the answers that you will need to get all the points awarded in Q1.

a) Would she sell or buy BRL futures to hedge the currency risk?

b) How many futures contracts would she use to hedge?

c) Does she end up over hedged or under hedged?

d) Does she benefit ex-post in MTM (marked to market) terms or not, from a move from .17USD per BRL to .20USD per BRL, given she is over or under hedged?

e) Can she have a liquidity issue if BRL futures went from .17USD to .20USD?

Reference no: EM133058223

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