Derivatives

Derivatives
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Question 1
Ans. 1 Foreign currency hedge
Lufthansa (a German airline) company is to due to pay €273.311 million to its Boeing (an
American company) on July, 5th.
So: $1.3808/€
September futures contract fo: $1.3492/€ (Contract size: 1, 25,000 Euros)
N= -S/f = -273.311m/0.125 = - 2186.488 or Long hedge by buying 2190 contracts
On July, 5th
St= $1.2656/€
ft= $1.243/€
To buy €273.311 million*$1.2656/€ = $-345.902
Long futures (t=0) $1.3492*2190*0.125 = $-381.662
Sell futures = $1.243*2190*0.125 = $ 340.271
Cost of € 273.311m = -$345.902 - $41.391 = -$387.293
Actual rate = $1.243/€
Question 2
Ans.
Pay by the investors = 100,000*(9/100/2)18
= $45, 00
Question 3
Ans. 3 Nf = - MDb/MDf* b/f
MDb = 9
MDf = 8
b = 5, 00,000*1.140 = 5, 70,000
f = 104,938
= -9/8*570,000/104,938 = -1.125*5.432 = -6
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Profit on the hedge is 570,000 – 500,000*113/100+8 * (117,933 – 104,938) = -79,100 + 103,960
= 24,860.
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