Basic information for this currency pair EUR/USD # units required of the foreign currency1000000Direct pair (Y/N)Y # contracts needed to complete the...

Basic information for this currency pair

EUR/USD

# units required of the foreign currency1000000Direct pair (Y/N)Y

# contracts needed to complete the number of units8

BIdAskTransaction cost to trade one futures contract4Indirect price (beginning)N/AN/ATransaction cost to trade one options contract4Indirect price (end)N/AN/A

Direct price (beginning)1.2460001.2461002/2/2018DC1 date

Direct price (end)1.2410301.2411902/16/2018DC2 date

Pip converter (100 or 10000)

10000

Futures contract converter

1

Option price adjustment factor (1,100,10000)

1

1. Determine the percentage change in the currency's value over the period studied

Initial spot

Final spot

% change

1.246050

1.241110

-0.40%

1a. Determine the percentage change in the futures contract over the period. Compare these two numbers.

Futures price (beg)Futures price (end)% change

1.248550

1.243950

-0.37%

Futures moved less than spot2. Assume that on the day of DC1, you had contracted to purchase imports, which would require you to pay 1 million units of the currency on the day of DC2. (Students selecting JPY must use 100,000,000 units for this question and for the following questions. Students selecting CNY must use 10,000,000 units for this question and for the following questions)

a. If you had hedged your position with a forward hedge, how many dollars would you have paid for the goods as of the end of the period?

Initial spot

Total cost

Fwd points

Unit cost

b. If you had hedged your position with a futures hedge, how many dollars would you have paid for the goods as of the end of the school term?

Final spot

Futures price (beg)

Total cost (before CME costs)

Futures price (end)

Unit cost

Total cost

c. If you had hedged your position with a call option hedge, how many dollars would you have paid for the payables as of the end of the period? Answer for the ITM, ATM and OTM call options. Please consider a cost of capital for the firm of 8% when you estimate the "total" premium paid and a 360 day convention.Please remember that quotes for option premiums and the strike price for the options differ among currencies. Some of them will require different adjustments (divide by 100, divide by 1 or divide by 10000). Be very careful when you calculate the total $ cost per unit

Final spot

Cost of capital

# days

ITMOption price (beg)

Total cost (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Total cost

ATMOption price (beg)

Total cost (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Total cost

OTMOption price (beg)

Total cost (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Total cost

d. Assume that you used a money market hedge at the beginning of the school term by borrowing USD at the LIBOR rate + 2%, converted into the foreign currency and invested at the LIBOR rate for the foreign currency to obtain enough money to pay for the account payable. How many dollars would you have to pay on the loan at the end of the school term?

Int rate

Time (in days)

Units of foreign currency needed

Total cost

Equivalent in USD to borrow

Loan amount + interest

Int rate

e. If you did not hedge, how many dollars would you have paid for the goods as of the end of the school term?

Final spot0.009062

Total cost

f. Fill out the table below 

Strategy used for payablesUnit costTotal dollar amount paid before commissionsTotal cost after considering CME fees

Forward hedge

Future hedge

Call options hedge (ITM)

Call options hedge (ATM)

Call options hedge (OTM)

Money market hedge

No hedge

Consider that trading one futures contract and trading one option contract costs you $7.50. In order to calculate the total commission you need to know how many contracts need to be traded. Please check the size of the futures contract and report the number of contracts required in the transaction.

3. This question connects with the forecast obtained in Fxstreet

Assume that the hedging decision depended on the forecast of the currency from FX street. If ALL analysts suggest that foreign currency is going up, then you want to hedge 100% of the payables. If ALL analysts suggest that foreign currency is going down, then you will play it conservatively and only hedge 25% of the exposure. You can choose to hedge a fraction of the amount based on the number (%) of analysts expecting an increase. Select the level and calculate the profit/loss for each hedging technique compared to the unhedged position (no hedge case).

Pair movement that hurts us

# analysts expecting such movementAmount to leave unhedged

# forecasts avaiable

Amount to hedge

Percentage to hedge

Cost of payables if left unhedged

Unhedged costHedged costTotalP/L

Forward hedge

Future hedge

Call options hedge (ITM)

Call options hedge (ATM)

Call options hedge (OTM)

Money market hedge

Which alternative was best in this case? Was your forecast useful? 

4. Assume that as of the beginning of the school term, you had contracted to sell exports, which would result in your receiving 1 million units of the foreign currency at the end of the school term. 

a. If you had hedged your position with a forward hedge, how many dollars would you have received for the goods as of the end of the school term?

Initial spot

Total revenue

Fwd points

Unit price

b. If you had hedged your position with a futures hedge, how many dollars would you have received for the goods as of the end of the school term?

Final spot

Futures price (beg)

Revenue (before CME costs)

Futures price (end)

Transaction costs

Unit price

Net revenue

c. If you had hedged your position with put options, how many dollars would you have received for the goods as of the end of the school term (account for the premium that you paid for the put option)? Answer for the ITM, ATM and OTM put options. Please consider a cost of capital for the firm of 8% when you estimate the "total" premium paid.Please remember that quotes for option premiums and the strike price for the options differ among currencies. Some of them will require different adjustments (divide by 100, divide by 1000 or divide by 10000) Be very careful when you calculate the total $ received per unit

Final spot

Cost of capital

# days

ITMOption price (beg)

Revenue (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Net revenue

ATMOption price (beg)

Revenue (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Net revenue

OTMOption price (beg)

Revenue (before CME costs)

Total premium

Option price (end)

Transaction costs

Unit cost (before commission)

Net revenue

d. Assume that you used a money market hedge at the beginning of the school term by borrowing foreign currency at the LIBOR rate + 3%, converted into USD and invested in the business at an annual rate of 8%. How many dollars would you "receive" at the end of the school term?

Int rate

Time (in days)

Units of foreign currency received

PV of revenue

Equivalent in USD to deposit

Amount received + "interest"

Int rate

e. If you did not hedge, how many dollars would you have received for the goods as of the end of the school term?

Final spot0.009060

Total revenue

f. Fill out the table below 

Strategy used for receivablesUnit priceTotal dollar amount receivedAmount received after CME costs

Forward hedge

Futures hedge

Put options hedge (ITM)

Put options hedge (ATM)

Put options hedge (OTM)

Money market hedge

No hedge

Consider that trading one futures contract and trading one option contract costs you $7.50. In order to calculate the total commission you need to know how many contracts need to be traded. Please check the size of the futures contract and report the number of contracts required in the transaction.

5. This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement.

If ALL analysts think the foreign currency is going up, then you want to hedge the lowest amount possible of the receivables, which is 25% If the forecasts suggest the foreign currency is going down, then you will definitely want to hedge 100% of the exposure. You can vary your amount to hedge based on the number (%) of analysts expecting an adverse movement. Select the hedging level and calculate the profit/loss for each hedging technique. Compare to the unhedged position (no hedge case) and determine what strategy was the best.

Pair movement that hurts us

# analysts expecting such movementAmount to leave unhedged

# forecasts avaiable

Amount to hedge

Percentage to hedge

Amount received if left unhedged

Unhedged revenueHedged revenueTotalP/L

Forward hedge

Future hedge

Put options hedge (ITM)

Put options hedge (ATM)

Put options hedge (OTM)

Money market hedge

Value created

Which alternative was best in this case? Was your forecast useful?

6. What have you learned about the different hedging methods? Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier? Which has a higher initial cost?