On January 10, Volkswagen agrees to import auto parts worth $8 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $1.3437/€ and the March futures price is $1.3502.
(a) Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract. (note: The size of one unit futures contract is €125,000)
(b) On March 4, the spot rate turns out to be $1.3462/€, while the March futures price is $1.3473/€. Calculate VW’s net euro gain or loss on its futures position. Compare this figure with VW’s gain or loss on its unhedged position.