Topic Forward Market Hedge 28 Your firm is an Italian exporter of bicycles You

Topic forward market hedge 28 your firm is an italian

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Topic: Forward Market Hedge
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28) Your firm is an Italian exporter of bicycles. You have sold an order to a British firm for £1,000,000 worth of bicycles. Payment from the customer (in pounds sterling) is due in 12 months. Detail a strategy using futures contracts that will hedge your exchange rate risk. Have anestimate of how many contracts of what type and maturity.U.S. $ equiv.Currency per U.S. $Contract SizeCountryTuesdayMondayTuesdayMonday£10,000Britain (pound)$1.9600$1.9400£ 0.5102£ 0.51551 month forward$1.9700$1.9500£ 0.5076£ 0.51283 months forward$1.9800$1.9600£ 0.5051£ 0.51026 months forward$1.9900$1.9700£ 0.5025£ 0.507612 months forward$2.0000$1.9800£ 0.5000£ 0.505110,000Euro$1.5600$1.5400€ 0.6410€ 0.64941 month forward$1.5700$1.5500€ 0.6369€ 0.64523 months forward$1.5800$1.5600€ 0.6329€ 0.64106 months forward$1.5900$1.5700€ 0.6289€ 0.636912 months forward$1.6000$1.5800€ 0.6250€ 0.6329SFr.10,000Swiss franc$0.9200$0.9000SFr. 1.0870SFr. 1.11111 month forward$0.9400$0.9200SFr. 1.0638SFr. 1.08703 months forward$0.9600$0.9400SFr. 1.0417SFr. 1.06386 months forward$0.9800$0.9600SFr. 1.0204SFr. 1.041712 months forward$1.0000$0.9800SFr. 1.0000SFr. 1.0204A) Go long 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.B) Go short 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.C) Go long 100 12-month pound futures contracts; and short 125 12-month euro futures contracts.D) Go short 100 12-month pound futures contracts; and long 125 12-month euro futures contracts.E) none of the options
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Answer: DExplanation: 100 contracts = £1,000,000 / £10,000; $2,000,000 = £1,000,000 × $2; Solve the proportion for X: ($2,000,000 / X) = ($1.60 / €1), where X= €1,250,000. Next, €1,250,000 / €10,000 = 125 contracts.Topic: Forward Market Hedge
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29) Your firm is an Italian importer of bicycles. You have placed an order with a British firm for £1,000,000 worth of bicycles. Payment (in pounds sterling) is due in 12 months. Detail a strategyusing futures contracts that will hedge your exchange rate risk. Have an estimate of how many contracts of what type and maturity.U.S. $ equiv.Currency per U.S. $Contract SizeCountryTuesdayMondayTuesdayMonday£10,000Britain (pound)$1.9600$1.9400£ 0.5102£ 0.51551 month forward$1.9700$1.9500£ 0.5076£ 0.51283 months forward$1.9800$1.9600£ 0.5051£ 0.51026 months forward$1.9900$1.9700£ 0.5025£ 0.507612 months forward$2.0000$1.9800£ 0.5000£ 0.505110,000Euro$1.5600$1.5400€ 0.6410€ 0.64941 month forward$1.5700$1.5500€ 0.6369€ 0.64523 months forward$1.5800$1.5600€ 0.6329€ 0.64106 months forward$1.5900$1.5700€ 0.6289€ 0.636912 months forward$1.6000$1.5800€ 0.6250€ 0.6329SFr.10,000Swiss franc$0.9200$0.9000SFr. 1.0870SFr. 1.11111 month forward$0.9400$0.9200SFr. 1.0638SFr. 1.08703 months forward$0.9600$0.9400SFr. 1.0417SFr. 1.06386 months forward$0.9800$0.9600SFr. 1.0204SFr. 1.041712 months forward$1.0000$0.9800SFr. 1.0000SFr. 1.0204
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