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A US firm is receiving 7m EUR in 3 months time. EUR Futures are available...

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Finance

A US firm is receiving 7m EUR in 3 months time. EUR Futures are available on the Chicago Mercantile Exchange (CME) with a contract size of 125,000 Euros and currently trade at 1.15 EUR/USD. The contract maintenance margin is 2300 USD with an initial margin of 110% of the maintenance margin.

  1. a) Does the firm have a long or short foreign currency exposure?

  2. b) In order to hedge does the firm need to buy or sell Futures contracts?

  3. c) How many contract positions should be entered in to?

  4. d) What will be the initial futures cash flow required?

  5. e) Assuming that the exposure and contract maturity dates are the same, what is the expected

total net USD cashflow? (You may ignore the time value of money) Show all workings.

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