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On January 10, Volkswagen agrees to import auto parts worth $7 million from the United States. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into CME futures contracts. The spot rate is $0.8947/€, and the March futures price is $0.9002/€.

a. Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract.

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b. On March 4, the spot rate turns out to be $0.8952/€, while the March futures price is $0.8968/€. Calculate VW’s net euro gain or loss on its futures position. Compare this figure with VW’s gain or loss on its unhedged position.

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