Fin5545 Currency Futures Project Management Assessment Answers
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”.
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.
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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