Question：Assume that it is now 30 June. KYT Inc is a company located in the USA that has a contract to purchase goods from Japan in two months time on 1 September. The payment is to be made in yen and will total 140 million yen.
The managing director of KYT Inc wishes to protect the contract against adverse movements in foreign exchange rates and is considering the use of currency futures. The following data are available.
Spot foreign exchange rate
Yen/$ 128.15
Yen currency futures contracts on SIMEX (Singapore Monetary Exchange)
Contract size 12,500,000 yen, contract prices are $US per yen.
Contract prices: September 0.007985
December 0.008250
Assume that futures contracts mature at the end of the month.
How many contracts should be bought to hedge this transaction?
A. 10
B. 12
C. 11
D. 9
The correct answer is:11 contracts.
To calculate this take 140 million Yen and divide by 12.5 million Yen for each contract. This gives 11.2 contracts. As it is not possible to enter into part of a contract we will go for 11 contracts as the closest. We could try 12 contracts but that would demonstrate a more risk seeking, less risk averse position.
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