How to hedge payments in a foreign currency?
I´m confronted with solving the following exercise:
"Suppose that now is 1 March. You are a UK based exporter who´ll export products to a U.S. company for 250,000 US dollars and to a French company for 400,000 euros. Both deals are on credit terms with payment in 90 days. Calculate the expected outcomes of alternative strategies that you might use to hedge the foreign exchange risk exposed to both contracts."
I have given the market data in the photo.
Strategy with futures:
I know that selling a Euro Future with a contract size of 125,000 EUR means that I will have to exchange 125,000 EUR for 106,775 GBP (125,000 EUR * 0.8542 GBP/EUR). Nevertheless, I´m confused with the contract size. What can I do if the contract size does not exactly fit the size of the payment (400,000 EUR / 125,000 EUR = 4.2 contracts)?
Strategy with options:
I would want to buy a put option so that I can sell the USD. The contract size is given in GBP so I have to convert it to USD. For the Strike of 1.60 USD this gives me a contract size of 100,000 USD (1.60 USD / GBP * 62,500 GBP) and for the 1.62 USD strike 106,250 USD (1.62 USD / GBP * 62,500 GBP). Again the contract doesn´t really fit as I either need 2.5 or 2.47 contracts.
Should I suggest to only sell either 4 future contracts or buy 2 options to hedge the majority or is it something else they want to hear? Are my thoughts and calculations generally correct? Are there any other alternative strategies to hedge?
- Anonymous3 weeks ago