Imagine you are a currency speculator starting out with the sum of $1,000,000. Here is your step-by-step

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Question:

Imagine you are a currency speculator starting out with the sum of $1,000,000.

Here is your step-by-step plan:

(1) Select a foreign currency you want to speculate for or against. Do not select a currency that is on a fixed exchange rate regime, such as the Cuban peso. Use the standard end of trading day market quotes for exchange rates, such as those listed daily in the Wall Street Journal. Do not use an ask-bid type of quote.

(2 Based on your preliminary analysis, decide whether this currency is going to appreciate (go up) or depreciate (go down) against the dollar in five weeks from February 4 to March 11, 2022.

(3) If you think it will appreciate, you must take a long position and use your $1,000,000 to buy this currency in order to sell it at the end of the holding period and make a profit.

(4) If you think the opposite will happen, you must take a short position, borrowing the foreign currency today against your $1,000,000 as a collateral selling it immediately and hoping to repay the loan at the end of the period by buying up the foreign currency at a cheaper rate.

(5) Follow the fluctuations of your currency exchange rate against the dollar using The Wall Street Journal, or any other official source. Enter these data in a statistical table and draw a graph.

(6) At the end of the period, figure out how much you have lost or gained in your speculation. Annualize the returns.

(7) Provide a short commentary about the behavior of your currency and list any identifiable reasons for its fluctuations.

Note: In the speculation part of your currency project (SECTIONS 1-7), you need not consider any currency exchange fees, an interest that would be due on the borrowed foreign currency, or any other transaction cost.

(8) Based on what you've learned in your speculation steps (1) through (7) describe how you would use forex forward markets to HEDGE currency risk for an export or import transaction worth $1,000,000. For example, how would you hedge currency risk being a US exporter of bourbon or an importer of autos? Assume that the time gap between the signing of your trade contract and payment is three months and that during that period a foreign currency in question experiences a major unexpected appreciation or depreciation (say, 10-20%). Assume that the 3-month forward rate for a foreign currency is equal to its spot rate. Describe your choices for hedging and provide estimates of its benefits and costs. Express the costs of hedging as a percentage of the total volume of your export/import transaction and in $$. For a forward contract assume the upfront fee of 1.5%, for an option assume a fee of 3-4%. If you need to use data for interest rates, use the US prime rate vs. the equivalent rate of a foreign country.

The whole project should not be more than 4-5 pages long single-spaced of which one page will be a statistical table and one page a graph (approx. 1000 words of text). Do not worry if you "lose money." That will not affect the evaluation of your project in any way. What is important is your understanding of currency trading and hedging, your grasp of relevant data, your reasoning, and a meaningful commentary.

Sources: Ch. 10-11 of the text; Data and commentaries on FOREX can be found at Pacific Exchange Rate Service; Yahoo Finance/currencies; The Wall Street Journal currency markets section and in many online sources.