A US importer is concerned about the appreciation of Euro against USD due to Euro payables of EUR10,000,000 in three months. To hedge (protect himself/herself) the position, exporter decides to use futures markets. Currently CME (Chicago Mercantile Exchange) EURO contracts (125,000 each) are traded at USD1.0814. Spot rate is EUR/USD1.0751-0756 (USDs per EURO). Suppose the exporter takes an equal futures position to its cash market position (EUR10m) at $1.0814. Provided that futures contract price and spot rates are $1.1250/Euro and $1.0935/Euro respectively when the hedge is liquidated, what should be the unit cost of EURO for the US importer in USD terms.
What should be the unit cost of EURO for the US importer in USD terms.
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