Please show all of your calculations A US importer, who incurs costs in Euro\'s
ID: 2742791 • Letter: P
Question
Please show all of your calculations
A US importer, who incurs costs in Euro's and bills its customers in USD, is concerned about the depreciation of USD against Euro due to EURO payables of 10,000,000 in a month. To hedge (protect himself/herself) the position, importer decides to use futures markets. Currently EURO contracts (125,000 EURO each) are traded at $0.8470. Spot rate is $0.8310 (ie EUR/USD 0.8310). Suppose the importer takes an equal futures position to its cash market position (Euro10m) at $0.8470. Assume that futures contract price and spot rates are $0.8600, $0.8540 respectively when the hedge is liquidated. What should be the unit cost of EURO for the importer in terms of USD?
0.8600
0.8540
0.8670
0.8410
A)0.8600
B)0.8540
C)0.8670
D)0.8410
Explanation / Answer
The importer has made contract at $0.8470 per Euro. Current spot rate is $0.8310. Contract rate and spot rate at time of expiration is $0.8600 and %.8540.
Unit cost of EURO for the importer in terms of USD is the spot rate at time the future contract is liquidate.
So unit cost of Euro for importer in term of dollar is $0.8540
Hence, option (B) is correct answer.
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