Question: You expect to make a 400,000 payment in British Pounds on close of business day on Friday. You decide to hedge your risk with futures contracts. Assume you enter into the position at close of day on Wednesday at the futures price of 1.2302. The size of one futures contract on British Pound is 62,500 pounds.
A) What is the total cost in US dollars after you have closed out your positions, and made your payment?
B) What would have been the total cost in US dollars if you had not hedged? Was there any benefit in hedging?
C) What would be the effective price per British Pound?
Assume that the spot price on friday: 1.2415.
| Month |
Change |
Settle |
| April |
+0.0038 |
1.2407 |
| May |
+0.0039 |
1.2416 |