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  3. 2. you are to pay €350,000 on march 16. today’

2. You are to pay €350,000 on March 16. Today’s spot rate is $1.15/€. The forward...

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Accounting

2. You are to pay €350,000 on March 16. Today’s spot rate is$1.15/€. The forward rate is $1.18/€. On March 16 the spot rate is$1.14/€. Futures contracts are for €125,000 each.

Q1. How many contracts do you enter?
Q2. Do you enter contracts to buy or to sell?

On March 16you, 1) close out the forward contracts, and 2)receive the €350,000 and exchange them for dollars.

Q3. Did you make or lose money on the contracts?
Q4. How much money did you make or lose on the contracts?
Q5. When you combine the gain or loss on the futures contracts withthe dollars exchanged for the €350,000 what was the effectivedollar/euro total exchange rate?
Q6. Why was the amount you received per euro more than the $1.18future contract hedge amount?

Answer & Explanation Solved by verified expert
4.4 Ratings (980 Votes)
ANSWER Q1 The number of contracts to enter is amount receivable size of futures contract 350000 125000 which is 280 Rounding off to the nearest number you enter into 3 futures contracts Q2 The US company will receive Euros and exchange them for dollars Therefore the    See Answer
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2. You are to pay €350,000 on March 16. Today’s spot rate is$1.15/€. The forward rate is $1.18/€. On March 16 the spot rate is$1.14/€. Futures contracts are for €125,000 each.Q1. How many contracts do you enter?Q2. Do you enter contracts to buy or to sell?On March 16you, 1) close out the forward contracts, and 2)receive the €350,000 and exchange them for dollars.Q3. Did you make or lose money on the contracts?Q4. How much money did you make or lose on the contracts?Q5. When you combine the gain or loss on the futures contracts withthe dollars exchanged for the €350,000 what was the effectivedollar/euro total exchange rate?Q6. Why was the amount you received per euro more than the $1.18future contract hedge amount?

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