A Chicago merchant plans to import a shipment of materials from France costing 1

Question

A Chicago merchant plans to import a shipment of materials from France costing 1,000,000. Spot exchange rate is $1.28. To hedge against a rise in the value of the euro, the merchant buys March euro futures at a futures price of $1.32. Contract size is 125,000. To offset the futures position, the merchant should:

Buy the same number of euro futures contracts as was purchased at the outset

Sell U.S. dollar futures equal in size to the euro futures.

Sell the same number of euro futures contracts as was purchased at the outset

None of the above

Buy the same number of euro futures contracts as was purchased at the outset

Sell U.S. dollar futures equal in size to the euro futures.

Sell the same number of euro futures contracts as was purchased at the outset

None of the above

Explanation / Answer

Buy the same number of euro futures contracts as was purchased at the outset as the mechants should cover its currency risk

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