Brazilian real hedging with futures
The US dollar (USD) to Brazilian real (BRL) exchange rate was 0.5793 USD/ BRL on October 21, 2010. By January 17, 2011 it had moved to 0.5934 USD/ BRL. Over the same time-period, BRL 3-month futures had moved from 0.5826 USD/ BRL. Assume the maturity date of this BRL futures contract to be December 21, 2010.
1. If your organization imported goods worth 0.5 million BRL, how many BRL futures contracts will be needed for hedging against currency risk? {Assume each BRL futures contract has a face-value of 100,000 BRL}
2. Describe the futures hedging strategy. What is the outcome of the 3-month hedging strategy that you have implemented?