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Today is May 2, and Bid and Ask are $1.2100/E and $1.2300/E. The August 21 and September 20 futures contracts are priced at is $1.2500 and $1.2600 respectively. Each contract controls 100,000E. You are receiving 418,000E in Euro revenues on September 9th. Assume that currently, the September 9th forward is $1.2560.
How would you properly hedge the revenues using futures contracts? Discuss why, how much you will be over or under-hedged, and the risks.a. Buy 3 August Euro-futures contractsb. Sell 3 August Euro-futures contractsc. Sell 4 September Euro-futures contractsd. Buy 4 September Euro-futures contractse. Sell 3 September Euro-futures contracts
If we properly hedge the above revenue, are we over-hedged or under-hedged, and what will cause the hedge to lose money? Explain why.a. Over-hedged, an appreciation of the Euro relative to the forwardb. Over-hedged, a depreciation of the Euro relative to the forwardc. Under-hedged, an appreciation of the Euro relative to the forwardd. Under-hedged, a depreciation of the Euro relative to the forwarde. Nothing, the hedge will work perfectly
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