In the Nov'11 paper for SFM, Q 2(b)
UK co. selling to a german firm.
Order size = Euro 4 million.
Credit = 6 months
Spot : 1 GBP = Euro 1.1750/1.1770
6 m Further (Future) contract is currently trading at Euro 1.1760 per GBP
6 m Future contract size = GBP 62500
Spot rate & 6 m future rate : Euro 1.1785 per GBP
Hedge through Futures contract.
Suggested Answer :
No. of future contracts = 54 { 4000000/(1.176*62500) }
Buy future at 1.1760
Sell future at 1.1785
Profit on future = [1.176-1.1785] * 62500 * 54 = 8438 Euro
I/F aft 6 m = 4000000 + 8438
GBP Receipts = 4008438/1.1785 = GBP 3,401,305
Question - Where did this profit come from ?
CAclubindia
