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Hope all is well!
I have two doubts in relation to this scenario.
Q1) I have used a different method to calculate the number of future contracts, as mentioned below, Could please confirm whether this method is applicable in the exam?
=(EUR 20,000,000/EUR 0.8656) = $23,105,360
= $23,105,360/$125000 = 185 contracts approx.
Q2) I have computed the over hedged amount for future contracts. Please confirm whether I have done it correctly? Pls advise!
Future Contracts (185contracts x $125000) = $23,125,000
Expected Receipt = $23,121,387
Thank you in advance for your kind explanation!
Q1. Strictly you should have calculated the number of contracts using the lock-in rate (as in the answer) although you would probably still get the marks.
Q2. What you have done is not correct. Given that the receipt is in €’s, the over-hedge is in €’s and is the difference between the €20M and the number of contracts converted at the lock-in rate.