Question

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Future Hedge on Receivables. Suppose it is the middle of February, and Nancy Foods, an American firm, has just contracted to sell frozen chickens to a German firm. Nancy firms will receive €250,000 in the middle of March and is considering hedging the exposure with futures contracts. The contract size of the euro futures is €125,000, so Nancy Foods uses two contracts. Will Nancy foods buy or sell the futures to hedge on receivables, assuming the following exchange rates are observed? Spot rate Future rate February €/$=1.24 March €/$=1.35 €/$=1.23 March

Answer 1

The firm will received euros, and needs to sell the euros after the payment is received. The base currency of the futures contract is euros. Hence, the firm will sell the futures to hedge its receivables.

Number of futures contract to sell = amount receivable in euros / size of each futures contract

Number of futures contract to sell = 250,000 / 125,000 = 2.

Net amount received in $ = number of futures contracts sold * contract size * future rate

Net amount received in $ = 2 * 125,000 * 1.23

Net amount received in $ = $307,500