Can someone help me explain the loss calculation for this question?
I don’t understand what is happening when he closes out the position.
Question
Barney Wood imports goods to the U.K. from the Eurozone. He is due to make a payment in 30 days of €20 million. Wood is concerned that the pound will depreciate against the euro over this period and would like to hedge his currency risk with futures. The current spot rate is £/€ = 0.8929.
Cross-Currency EUR-GBP Future
Futures price* £/€ 0.8989
Contract size €125,000
*Expires in 40 days
In 30 days, the exchange rate is £/€ = 0.9034 and the futures price is £/€ 0.9054. Calculate the cost to Wood if he hedges the position using the future.
Answer
Cost of euro strengthening = £18,068,000 – £17,858,000 = £210,000
Profit on hedge = (£0.9054 – £0.8989) × €20,000,000 = £130,000
Note that when Barney enters the contract, he is agreeing to buy euros at £0.8989, and when he closes out, he is agreeing to sell euros at £0.9054.
Net position = £130,000 – £210,000 = loss £80,000