You have delivered 100,000 bushels of Red Wheat # 4 to a customer in Amsterdam a

Question

You have delivered 100,000 bushels of Red Wheat # 4 to a customer in Amsterdam at a price of 1.923 Euros per bushel. Under the terms of the agreement you will receive payment in Euros in 90 days. The current $/Euro exchange rate is $1.35 per Euro. Eurobor, the rate at which you can borrow/or lend in Euros is 6%. You can purchase/sell forward contracts for Euros for delivery in 90 days at a price of 1.95 Euro’s per dollar.
(a) Structure a hedge for your exposure using forwards. What is the effective $/Euro rate that you lock in?
(b) Structure a synthetic forward that would hedge your exposure. What is the effective $/Euro rate that you lock in?
(c) Which hedging technique would you choose?

Explanation / Answer

1.Structure a hedge for your exposure using forwards. What is the effective $/Euro rate that you lock in?.
The effective rate would be = 1+(0.06/4)^4 =6.136% the the euro would be = 1*(6.136%/360)*90 =1.01534 euros Rate = 1.35 / 1.01534 2.Structure a synthetic forward that would hedge your exposure. What is the effective $/Euro rate that you lock in? =100000 bushels *1.923 =192300 euros in dollars = 192300 *$1.35 =259605. interesrt at 6% for 90 day =192300 * 6%/12)*90 days =$2884.5 total = 192300+288.5 =195184.5 euros rate = 195184.5 /100000 bushels =1.951845 euros c) Which hedging technique would you choose?
I will be in the position with frward contract when 1.951845 euro rate above - sell ,below - purchase.

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