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 contracts
b. Sell 3 August Euro-futures contracts
c. Sell 4 September Euro-futures contracts
d. Buy 4 September Euro-futures contracts
e. 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 forward
b. Over-hedged, a depreciation of the Euro relative to the forward
c. Under-hedged, an appreciation of the Euro relative to the forward
d. Under-hedged, a depreciation of the Euro relative to the forward
e. Nothing, the hedge will work perfectly