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FIN5545 Currency Futures Project
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FIN5545 Currency Futures Project
0 Download9 Pages / 2,172 Words
Course Code: FIN5545
University: Jomo Kenyatta University Of Agriculture And Technology
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: Kenya
Question:
Instead, you decide to convert to USD in 2 months and delay paying the tax. This delayed action comes with a big risk. Since EUR/USD exchange rate fluctuates every day, the US dollar value of your Euros in 2 months will no longer be the same dollar amount. This risk is called currency risk, aka foreign exchange rate (FOREX) risk.
The objective of this project is to design a strategy such that the conversion value stays close to $12,295,000 throughout the whole sample period. The financial instrument for this project is Euro FX futures contract expiring in “December 2018”.
To hedge against the exchange rate risk in your scenario above, should you “long” or “short” Euro FX futures today? Explain. (Hint: converting one currency to another currency is equivalent to buying or selling a foreign currency.)
What is the contract size of the Euro FX futures contract? Is the British Pound futures contract size the same as Euro FX futures? How many Euro FX futures contracts do you need to long/short today?
The rest of this project will prove whether your answer to Q1/Q2 is the correct position. If you don’t find a sufficient evidence of risk hedging later, it’s likely that your answer to Q1/Q2 is incorrect.
For every trading day (no holiday/weekends) during the sample period, collect the EUR/USD exchange rate (using either Bloomberg, Yahoo, Google, Fed, etc) and Euro FX futures price (using CMEgroup).
Answer:
Explaining the position that needs to be taken for hedging the exchange risk:
The company can take short position in the futures contract for adequately declining the risk of converted values, which might affect the performance. Moreover, taking the short position in the futures contract might eventually help in maintaining profitable conversion values, if the overall spot prices decline over the period of time. Therefore, Euro FX Futures need to be shorted.
Indicating the contract size and number of contracts will be used for hedging the payment:
The overall future contract size is mainly at the levels of €125,000.00 for one future contract. The overall future contract for British Pound futures contract size is mainly at the level of £62,500.00, while the contract value of Euro FX is at the level of €125,000.00 (Cmegroup.com 2018). Hence, from the overall calculation it can be detected that 90 Euro FX contract can be shorted today for adequately hedging the future contracts.
Providing three column spread sheet:
Date
EUR/USD
EURO FX Future Price
10/22/2018
1.14200
1.15170
10/23/2018
1.13280
1.15170
10/24/2018
1.13100
1.14355
10/25/2018
1.12910
1.14075
10/26/2018
1.12180
1.14545
10/29/2018
1.13360
1.14345
10/30/2018
1.13630
1.13845
10/31/2018
1.14260
1.13555
11/1/2018
1.14270
1.14470
11/2/2018
1.14070
1.14225
11/5/2018
1.13870
1.14555
11/6/2018
1.14090
1.14485
11/7/2018
1.13120
1.14905
11/8/2018
1.13440
1.13880
11/9/2018
1.13730
1.13670
11/12/2018
1.14030
1.12710
11/13/2018
1.13760
1.12980
11/14/2018
1.13920
1.13665
11/15/2018
1.14710
1.13770
11/16/2018
1.14650
1.14380
Calculating daily and cumulative returns of future position:
Date
Daily Gains
Cumulative Gains
10/22/2018
–
–
10/23/2018
–
–
10/24/2018
91,687.50
91,687.50
10/25/2018
31,500.00
123,187.50
10/26/2018
(52,875.00)
70,312.50
10/29/2018
22,500.00
92,812.50
10/30/2018
56,250.00
149,062.50
10/31/2018
32,625.00
181,687.50
11/1/2018
(102,937.50)
78,750.00
11/2/2018
27,562.50
106,312.50
11/5/2018
(37,125.00)
69,187.50
11/6/2018
7,875.00
77,062.50
11/7/2018
(47,250.00)
29,812.50
11/8/2018
115,312.50
145,125.00
11/9/2018
23,625.00
168,750.00
11/12/2018
108,000.00
276,750.00
11/13/2018
(30,375.00)
246,375.00
11/14/2018
(77,062.50)
169,312.50
11/15/2018
(11,812.50)
157,500.00
11/16/2018
(68,625.00)
88,875.00
Providing calculation of margin:
Date
Margin Account Balance
10/22/2018
720,000.00
10/23/2018
720,000.00
10/24/2018
811,687.50
10/25/2018
843,187.50
10/26/2018
790,312.50
10/29/2018
812,812.50
10/30/2018
869,062.50
10/31/2018
901,687.50
11/1/2018
798,750.00
11/2/2018
826,312.50
11/5/2018
789,187.50
11/6/2018
797,062.50
11/7/2018
749,812.50
11/8/2018
865,125.00
11/9/2018
888,750.00
11/12/2018
996,750.00
11/13/2018
966,375.00
11/14/2018
889,312.50
11/15/2018
877,500.00
11/16/2018
808,875.00
There was no margin call issued at any time of the trade window.
Calculating Unhedged and hedged value of the future contract:
Date
Unhedged Value
Hedged Value
10/22/2018
12,847,500.00
12,847,500.00
10/23/2018
12,744,000.00
12,744,000.00
10/24/2018
12,723,750.00
12,815,437.50
10/25/2018
12,702,375.00
12,825,562.50
10/26/2018
12,620,250.00
12,690,562.50
10/29/2018
12,753,000.00
12,845,812.50
10/30/2018
12,783,375.00
12,932,437.50
10/31/2018
12,854,250.00
13,035,937.50
11/1/2018
12,855,375.00
12,934,125.00
11/2/2018
12,832,875.00
12,939,187.50
11/5/2018
12,810,375.00
12,879,562.50
11/6/2018
12,835,125.00
12,912,187.50
11/7/2018
12,726,000.00
12,755,812.50
11/8/2018
12,762,000.00
12,907,125.00
11/9/2018
12,794,625.00
12,963,375.00
11/12/2018
12,828,375.00
13,105,125.00
11/13/2018
12,798,000.00
13,044,375.00
11/14/2018
12,816,000.00
12,985,312.50
11/15/2018
12,904,875.00
13,062,375.00
11/16/2018
12,898,125.00
12,987,000.00
Plotting hedged and unhedged value, while calculating their standard deviation:
Particulars
Unhedged Value
Hedged Value
Standard Deviation
69,586.41
111,475.27
Indicating whether the strategy hold grounds and lowed the exchange rate risk:
From the overall evaluation it can be detected that the standard deviation values of he unhedged is relatively low as compared to hedged values. This directly indicates that hedging measures has mainly secure the organisations transaction. Moreover, the hedging strategy of selling the future contract has helped in curbing the risk from volatile exchange rate.
Indicating whether Eurodollar can be used as currency derivative, while stating when companies would use Eurodollar:
Yes, Euro Dollar Futures is also a currency derivates, which are used by companies to curbing the losses during the currency conversion. For example, if a US company selling goods to Europe gets payments in EUR, which will have exchange rate risk. Hence, Eurodollar can be used for curing the losses incurred from currency transaction and minimise the conversion value.
Indicating the derivative options that can be used for investment:
The use of Options on Euro/US Dollar Futures can be conducted, which might eventually help minimise the risk from declining values and maximise the profit levels. The option contract relatively allows the organisation to exercise the contract on their will, which is not possible in futures contract. Hence, buying put option will eventually allow the organisation to minimise the risk when the values of the EUR/USD declines. However, when the values of the EUR /USD increase then the company can opt out of the option contract by paying only the premiums and generating high returns from the rising values (Mensi, Hammoudeh and Yoon 2015).
Reference
Cmegroup.com. 2018. British Pound Futures GBP/USD Quotes – CME Group. [online] Available at: https://www.cmegroup.com/trading/fx/g10/british-pound.html [Accessed 2 Dec. 2018].
Cmegroup.com. 2018. Euro FX Futures EUR/USD Quotes – CME Group. [online] Available at: https://www.cmegroup.com/trading/fx/g10/euro-fx_quotes_globex.html [Accessed 2 Dec. 2018].
Finance.yahoo.com. 2018. Yahoo is now part of Oath. [online] Available at: https://finance.yahoo.com/quote/EURUSD=X/ [Accessed 2 Dec. 2018].
Mensi, W., Hammoudeh, S. and Yoon, S.M., 2015. Structural breaks, dynamic correlations, asymmetric volatility transmission, and hedging strategies for petroleum prices and USD exchange rate. Energy Economics, 48, pp.46-60.
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