Question

Today is March 1. Disneyland, Inc. expects to receive 200 million Euro on Dec 31 from its subsidiary Disneyland in Paris. The company wants to convert Euro to USD on Dec 31 and enters into Euro futures contracts today. The futures exchange rate is 1.2300($ Euró) today. One contract is for 12.5 million Euro. What should the company's strategies to hedge the Euro exchange risk?

Answer 1

Disneyland, Inc. can hedge the Euro exchange risk by entering into Euro futures contracts today. They should buy 16 contracts, with each contract representing 12.5 million Euros. This will allow them to lock in a specific exchange rate and ensure they receive the expected amount of US Dollars on Dec 31.

Step-by-step explanation:

To hedge the Euro exchange risk, Disneyland, Inc. can use Euro futures contracts. Since the company expects to receive 200 million Euros on Dec 31, they can enter into Euro futures contracts today. One Euro futures contract is for 12.5 million Euros, so Disneyland, Inc. would need 16 contracts to hedge their position (200 million Euros / 12.5 million Euros per contract).

By entering into Euro futures contracts, Disneyland, Inc. can lock in a specific exchange rate for converting Euros to US Dollars on Dec 31, eliminating the risk of the exchange rate changing unfavorably. In this case, the futures exchange rate is 1.2300 (dollars per Euro) today. When they convert the Euros to Dollars on Dec 31, they will receive 1.2300 dollars for each Euro.

By hedging their Euro exchange risk with futures contracts, Disneyland, Inc. can ensure they receive the expected amount of US Dollars on Dec 31, regardless of any exchange rate fluctuations.