Directions:

1. If you need help or need clarification, ask in Teams. I'll help you solve but will not

confirm whether your answer is correct or not. For example, you can ask "how do I

calculate the daily futures gains?" and I'll provide formulas and point you to the

right direction. But if you ask "Here's my excel. Is my answer correct?", I won't

confirm it because it's unfair to other students.

2. You must start from a fresh new blank Excel file. Do NOT share your Excel or

copy other's Excel. If I find 2 students submitting almost identical files, I'll give F

to both students.

3. I am aware the solutions for previous projects are available online. I changed the

questions for this semester. If you submit a project answering old questions, you

will get F.

4. Submit 1 Excel file with all your answers/tables/plots (preferably in 1 tab). You can

submit multiple times to Canvas. Only the last submission will be graded. If you

prefer to write up answers in MS Word, upload both Word and Excel files together in

1 submission (do not submit separately, as I only grade the last submission).

The sample period for this project is from 3/8/2021 to 4/9/2021 (5 weeks). You will need

to collect real-time data starting from 3/8/2021.

On 3/8/2021 (today), your company receives 6.25 million Euros for selling products in

Germany. Currently, the EUR/USD exchange rate is 1.1870. So if you convert this 6.25 mil

Euros to USD today, it will be worth $7,418,875. You are extremely happy with this

current exchange rate and would take this US dollar value. However, if you convert now,

you may have to pay tax today.

Instead, you decide to convert Euros to USD at the end of next month and delay paying

the tax. However, this delayed conversion comes with a risk. Since EUR/USD exchange

rate fluctuates every day, the US dollar value of your Euros next month 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 today such that the USD value stays

close to $7.42 mil throughout the whole sample period. The financial instrument for this

project is Euro FX futures contract expiring in Apr 2021 (ticker: /6EJ21 or E6J21).

10 Questions (each is worth 1 point, consider each as a rubric):

1. When you convert 6.25 mil Euros into USD next month, are you "buying" or "selling"

Euros? To lock the exchange rate in this case, should you "long" or "short" Euro FX futures

today?

2. What is the contract size (aka. contract unit) of 1 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?

(Hint: Go to https://www.cmegroup.com (official futures exchange) and locate the Euro FX

futures. Check "Contract Specs" tab.)

The rest of this project will confirm whether your actions taken today (=answers to Q1/Q2)

are indeed the correct hedging strategy at the end. If you don't find sufficient evidence of

lowering risk in Q3-Q10, it's likely that your answers to Q1/Q2 are incorrect.

3. For every trading day (skip holiday/weekends) during the sample period, collect the

EUR/USD exchange rate (from either Bloomberg, Google, Yahoo, Fed, etc) and Euro FX

futures price (from CME or other sites).

The above screenshot is what the Euro FX futures quotes look like at cmegroup.com. The

price you need to collect is "Last" price (not Open, High, Low).

(Hint: There are free sources on the internet to get the futures price history. If you find

one, then you don't have to visit the cmegroup.com every day to collect data. You can ask

whether your source is correct in Teams. For these websites, "Last" price may be called as

"Close" price. )

I need a spreadsheet and 3 columns for

a. Date (exclude non-trading days)

b. EUR/USD exchange rate

c. Euro FX futures price

(Hint: The above screenshot is a suggested template for the spreadsheet. You can add

more columns.)

(Hint: FOREX and futures price will not be identical to each other. But they should be very

similar. If your FOREX is 0.80 and futures price is 1.20, then it's most likely you are using

an incorrect quote.)

4. In columns E and F, calculate "Daily Gains" and "Cumulative Gains" for your Euro FX

futures position from Q1 and Q2. Calculate these values in Excel. Do not manually

enter the values. If I don't see Excel calculation behind your answers, I'll assume you

copied someone else's answers, which is not acceptable for an individual project.

(Hint: How to calculate daily and cumulative gains is explained in Module 1.4. Daily

Settlements.)

5. Assume the initial margin requirement is $2,200 per contract and the maintenance

margin requirement is $2,000 per contract. In column G, calculate the "Margin Account

Balance" for each trading day. Is there a margin call at any time? If yes, add the required

cash to the margin account to avoid liquidation.

6. In column H, convert 6.25 mil Euros into USD using the exchange rates in column B for

each day. In column I, calculate the values of your "Hedged Value". (Hint: hedged value =

unhedged value in H + futures cumulative gains in F).

At this point, your spreadsheet should have the columns (A - I) in the screenshot above.

7. Plot the unhedged values and hedged values in Q6 over time. Discuss whether your

strategy was successful. Specifically, did your futures position lower the currency risk?

8. Calculate the standard deviations of the unhedged values in H. In addition, calculate the

standard deviation of hedged values in I. Discuss whether your strategy was successful.

9. If EUR/USD exchange rate increases in the future, the USD value of your Euros will

become higher, which will benefit you. Suppose you want to benefit from this positive

opportunity but still want to limit the loss against FOREX drop. For this objective, Euro FX

futures is a wrong instrument. Instead, which strategy should you use? In addition, which

specific financial derivative will this strategy involve?

(Hint: try to find a security that will payoff, if EUR/USD increases but not penalize if

EUR/USD decreases.)

10. Euro FX futures is an example of FX (or currency) derivatives. In Module 3, we learned

Eurodollar futures. Eurodollar futures may sound similar to Euro FX futures but they are

fundamentally different. What is Eurodollar futures? Why and when will a company use

Eurodollar futures? Using a specific example from Module 3 and discuss how a company

would use Eurodollar futures.

The currency information is in an excel file. I have attached the numbers below but I don't know if you are able to make sense of them. Module 1.4 and module 3 are downloaded videos. Can I send that to you as an attachment as well?

Date 10-May-21 11-May-21 12-May-21 13-May-21 14-May-21 16-May-21 17-May-21 18-May-21 19-May-21 20-May-21 21-May-21 23-May-21 24-May-21 25-May-21 26-May-21 27-May-21 28-May-21 30-May-21 31-May-21 1-Jun-21 2-Jun-21 3-Jun-21 4-Jun-21 6-Jun-21 7-Jun-21 8-Jun-21 9-Jun-21 10-Jun-21 11-Jun-21 13-Jun-21 14-Jun-21 15-Jun-21 16-Jun-21 17-Jun-21 18-Jun-21

Price 1.2154 1.216 1.2088 1.2084 1.215 1.2156 1.2166 1.2236 1.2179 1.2225 1.2187 1.2186 1.2218 1.2261 1.2197 1.2203 1.2205 1.2193 1.2236 1.2232 1.2214 1.2128 1.2167 1.2168 1.2197 1.2181 1.2181 1.2172 1.2103 1.2131 1.2122 1.2147 1.2039 1.1931 1.1892

Exchange rate 1.2139 1.2146 1.2074 1.208 1.2144 1.2146 1.2155 1.2225 1.2173 1.2228 1.218 1.2181 1.2218 1.2253 1.2194 1.2192 1.2193 1.2193 1.223 1.2214 1.2211 1.213 1.2167 1.2167 1.2192 1.2173 1.2177 1.2174 1.2109 1.2109 1.2121 1.2128 1.1996 1.1912 1.1864