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/Ă˘â€šÂ¬, and the March futures price is $0.9002/Ă˘â€šÂ¬.
a. Calculate the number of futures contracts that VW must buy to offset its dollar exchange risk on the parts contract.
b. On March 4, the spot rate turns out to be $0.8952/Ă˘â€šÂ¬, while the March futures price is $0.8968/Ă˘â€šÂ¬. Calculate VWĂ˘â‚¬â„˘s net euro gain or loss on its futures position. Compare this figure with VWĂ˘â‚¬â„˘s gain or loss on its unhedged position.
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