In hedging the currency risk, the investors hedge by the pricinpal by selling Euro 1 MM in euro future at $1.2891/Euro. WHen the investment is liquidated, the future exchange rate is $1.2760/euro. As a result, there is a gain related to the currency deprecaiton. But how come the future exchange changes from $1.2891/euro to $1.2760/Euro. Isn’t the future exchange rate a fixed number from the beginning to the end?
It is. This is just to show that if you need to liquidate the futures contract prematurely, you will have to close out your position at prevailing rate.