On June 15, a US firm is planning to import Mexican caviar worth Pesos 2 million due on July 15 (one month later). The firm decides to hedge its payables position by using September peso futures. The spot rate on June 15 is US$ 0.0630 / peso and the September futures price on June 15 is at $0.0665 per peso. One month late on July 15, the spot rate is $0.0570 / peso while the September futures price is $0.0615 / peso. Assume contract size is 2 million pesos.
Required:
1. What is the gain or loss from the futures hedge?

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yahayadanjuma55 yahayadanjuma55 · Answer 1 · 2020-06-04T04:17:32+02:00

Answer:

The firm incur a loss of $ 9,000 due to future contract

Explanation:

Let's compute the gain of loss from the future hedge as follows

As the US firm is importing the goods it will have to pay for the value in US dollars

Contract Size = 2,000,000 peso

Spot rate on 15 July = $ 0.0570/ peso

September future price on July 15 = $ 0.0615/ peso

Difference in Spot and Future rate = ( September future price on July 15 - Spot rate on 15 July )

= ( 0.0615 - 0.0570 )

= $ 0.045/ peso

This means that the firm will have to pay additional $ 0.045/ peso for the future contract which is a loss for the US firm

Total Loss = Difference in Spot and Future rate * Contract size

Total loss = 0.045 * 2,000,000

Total loss = $ 9,000

The firm incur a loss of $ 9,000 due to future contract.