A US firm expects to receive €600,000 in payment from a customer on March 31. What...
A US firm expects to receive €600,000 in payment from a customer on March 31. What position should the firm take if it wants to hedge the risk associated with this payment
a. using a forward contract?
b. using futures contracts on the Chicago Mercantile Exchange?
c. using an OTC option?
Homework Answers
Since the US Firm which operates in USD will be receiving euro 600,000, it would have to convert it to USD in order to use it in US.
Hence, there is a risk of USD Appreciation against the euro.
Hence, there is only the risk of USD Appreciation and not depreciation, we wouldn't use a Contingency claim or Over the counter options.
Disadvantage with the future contract are that they cannot be customised and are only available for fixed dates.
And as we have a certain amount and a certain date on which we want to get the money, we use a forward contract which will give us a right to buy USD in exchange for Euro.
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A US firm expects to receive €600,000 in payment from a customer
on March 31. What...
A US firm expects to receive €600,000 in payment from a customer on March 31. What...
A US firm expects to receive €600,000 in payment from a customer on March 31. What position should the firm take if it wants to hedge the risk associated with this payment a. using a forward contract? b. using futures contracts on the Chicago Mercantile Exchange? c. using an OTC option? (please be specific what position should be used, such as long or short and along those line).
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