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Answer: $1.170 million USD
**Correct answer: C — $1.170 million USD** To hedge a future purchase of euros, Rootridge would take a **long futures position**. 1. **Spot price at purchase time** - Basis = Spot − Futures = +0.02 - Futures price = 1.300 - So spot price = 1.300 + 0.020 = **1.320** 2. **Gain on futures** - Initial futures price was effectively 1.150 - Closed out at 1.300 - Gain per euro = 1.300 − 1.150 = **0.150** 3. **Net effective cost per euro** - Spot purchase cost = 1.320 - Less futures gain = 0.150 - Net cost per euro = **1.170** 4. **Total cost for 1,000,000 euros** - 1,000,000 × 1.170 = **$1,170,000** So the net cost including the hedge is **$1.170 million USD**.
Author: Manit Arora
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Q-21.13.2. Rootridge Industries is a U.S. Company that plans to purchase 1.0 million Euros in two years. Today it hedges this future purchase with Euro FX futures contacts; this size of each Euro FX contract is 125,000 Euros. The current spot price is EURUSD $1.150.
Consider the following scenario approximately two years into the future: Prior to their delivery, the futures contracts are closed out at a price of EURUSD $1.300, and the Euros are simultaneously purchased in the spot market when the basis is positive two cents; i.e., +$0.02. Under this scenario, what will be the net cost (including the hedge) in U.S. dollars to acquire the 1.0 million Euros?
A
$854,700 USD
B
$1.0 million USD
C
$1.170 million USD
D
$1.320 million USD
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