Explanation:

Correct answer: C — $1.170 million USD

To hedge a future purchase of euros, Rootridge would take a long futures position.

Spot price at purchase time
- Basis = Spot − Futures = +0.02
- Futures price = 1.300
- So spot price = 1.300 + 0.020 = 1.320
Gain on futures
- Initial futures price was effectively 1.150
- Closed out at 1.300
- Gain per euro = 1.300 − 1.150 = 0.150
Net effective cost per euro
- Spot purchase cost = 1.320
- Less futures gain = 0.150
- Net cost per euro = 1.170
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.

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 `$1.15`0.

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 `$1.30`0, 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?

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Last updated: April 18, 2026 at 11:32

$854,700 USD

40.0%

$1.0 million USD

20.0%

$1.170 million USD

40.0%

$1.320 million USD

Financial Risk Manager Part 1