A Company Enters into a Futures Contract with the Intent

Multiple Choice

A company enters into a futures contract with the intent of hedging an expected purchase of some equipment from a German company for DM400,000 on December 31. The contract requires that if the U.S. dollar value of DM800,000 is greater than $400,000 on December 31, the company will receive the difference. Alternatively, if the U.S. dollar value is less than $400,000, the company will pay the difference. Which of the following statements is correct regarding this contract?

A) The Deutsche mark futures contract effectively hedges against the effect of exchange rate changes on the U.S. dollar value of the Deutsche mark commitment.
B) The futures contract exceeds the amount of the commitment and thus hedges movements in the Deutsche mark exchange rate.
C) The futures contract is a contract to sell Deutsche marks at a fixed price.
D) The extra DM400,000 would be accounted for as a speculative investment.