In early April, a U.S. company is expecting to receive 1,250,000 Euros in June from its European customers, and wants to hedge against a fall in the value of the Euro relative to the U.S. dollar in June. At this time the spot exchange rate Euro is $1.086 USD. The CME Group future settle rate for June Euro FX futures contracts is 1 Euro = $1.091 USD, with each futures contract for 125,000 Euros per contract.
Type of position?
Why this position?
Number of contracts?
Suppose in June the spot rate for the Euro rises instead to $1.1946 USD and the futures settle rate falls to $1.200 USD.
What is the spot gain or loss?
What is the futures gain or loss?
What is the net hedging result?
Would the U.S. company have done better getting options on the Euro futures contract instead for this hedge? Explain why or why not