Answer to Question #160977 in Macroeconomics for hellen

Question

Consider a US export firm expecting to receive £2 million in 3 months. It is estimated that its profit will fall by $15,000 for every $0.01 depreciation of £. Each £/$ futures contract calls for delivery of £62,500. How could the firm fully hedge against the exchange rate risk? Should it buy or sell the £/$ futures contract? How many contracts should be bought or sold? 

Answer 1

the firm could hedge against exchange rate risk by selling future contracts for delivery of contracts of £62500.

it should sell future contracts.

no. of contacts =£2000000/£62500

= 32 contracts.

32 contracts should be sold.