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4. ROLLING THE HEDGE FORWARD It is April 2, 2022, and a U.S. company, which normally operates in the U.S. dollars, anticipates a need to make a payment of 2,750,000 for imports from Italy on April , 2022. The company intends to exchange the U.S. dollars for Euros at the spot exchange rate when the payment comes due, but is concerned with the volatility of the exchange rate. Therefore, the company wants to use futures contracts to hedge its exposure to the exchange rate risk. The futures on Euro are traded on Chicago Mercantile Exchange (CME) with delivery months of March, June, September, and December. Contracts are traded with maturities up to 18 months into the future. However, the company considers only contracts with the two nearest delivery months to be sufficiently liquid to meet its needs (e-9. June and September on April 25). The company's policy is to hedge 80% of its risk exposure. One contract is for 125,000. 2. Devise a rolling hedge strategy for the company, i.e. specify what positions should the company get into, what contracts and how many of them should the company use, and when should the company open and close its positions. Assume that the company rolls the hedge forward on the 1% of the month preceding the expiration month of the contract in which it currently has a position. For example, if the company had a March contract, it would roll the hedge forward on February 14 (ignore the fact that some dates may fall on the weekend). b. Assume that the spot and futures exchange rates (in s/e) today and at future dates are as given in the table below. If the strategy you proposed in part a. were implemented, what would be the net effective rate at which the company would exchange dollars for Euros on April 1, 2022? Round all results to four decimal places Contract Months Datet Spot price Sep 2021 Dec 2021 Mar 2022 Jun 2022 April 1, 2021 $1.19471 $11836/ $1.2088/ $1.1799/ $1.1760/ August 1, 2021 $1.2107/ $1.4798/ $1.1612/ $1.1595/ November 1, 2021 $1.1975/ $1.29571 $1.2038/

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