Part 1: Module 5: Hedging Interest Rate & FX Risk 1. In March, a U.S. Company is expecting to have to pay 1,250,000 Euros in May to its European customers, and wants to hedge against a rise in the value of the Euro relative to the U.S. dollar in June. At this time the spot exchange rate Euro is $1.2280 USD. The CME Group future settle rate for a May Euro FX futures contacts is 1 Euro = $1.2350 USD, with each futures contract for 125,000 Euros per contract.

a. What position and how many contracts should the financial manager take for the hedge? Explain why. (hint # contracts = Amount of Euros Hedging / 125,000 Euros per contract), 1,250,000 Euros / 125,000 Euros per contract = 10 Contracts Type of Position ______Futures Contract_______ Why this Position______If the Euro rises then we expect a spot position loss so we use Futures contracts. _______ Number of Contracts_________10______________________

b. Suppose in May the spot rate for the Euro changes to $1.2758 USD and the Euro futures FX price changes to $1.2828 USD. Calculate the spot opportunity loss or gain for the company and the futures gain or loss. What is the net hedging result? Spot Gain or Loss ____________ Futures Gain or Loss ___________ Net Hedging Result _____________ (Futures Gain or Loss Spot Gain or Loss)

2. In March, Greg Young, an insurance company portfolio manager for the Stay Solid Insurance Corporation has a stock portfolio of $500 million with a portfolio beta of 1.20. The portfolio manager plans on selling the stocks in the portfolio in June to be able to pay out funds to policyholders for annuities, and is worried about a fall in the stock market. In March, the CME Group E-Mini S&P 500 Futures contract index is 2752.75 for a June futures contract ($50 multiplier for the contract). a. What type of futures position should be taken to hedge against the stock market going down and how many future contracts are needed for this hedge? [Hint: # contracts = [Amount Hedged / Futures Index Price x Multiplier] x Beta Portfolio Type of Position _____________ Explain why ________________________________________ # of Contracts_____________

b. Suppose in June the stock market (S&P500 index) rises by 10% and the S&P500 futures index rises by 10% as well, what is the portfolio managers opportunity loss (gain) on his portfolio, and his futures gain (loss) and the net hedging result? Spot Gain or Loss ____________ Futures Gain or Loss ___________ Net Hedging Result _____________

c. What are the advantages and disadvantages of getting put options (options to sell) on S&P500 Mini Futures Contracts versus using Futures Options? Explain why or why not. Yes or No _______________ Explain why _________________________

3. In March, Fiona Fox, Treasury Manager for the Global Gathering Corporation, and plans on purchasing $1,000,000 of 91 day T-bills for the companys short-term portfolio when that amount of cash comes in to the company in May. At this time, the 91 day T-bill discount rate is 1.670%, implying a price of $1,000,000 [1 (.0167 x 91/360)] = $995,778.61. At this time, on the CME Group website, the May 2018 futures price for 90-day Eurodollar CD, the IMM index price is quoted as 97.695 (implying a discount rate of 100% - 97.695% = 2.305%), and each contract is for $ 1 million, implying a contract price of $1,000,000 [1 (.02305 x 90/360)] = $ 994,237.50.

a. Suppose Fiona wants to hedge her spot position against a fall in rates, that would make the purchase of the T-bills more expensive in May with a purchase of 1 Eurodollar CD contract, what position should she take short or long, and explain why? Long or Short Position ___________ Explain why __________________

b. Suppose in May, the T-bill discount rate falls to 1.47% and the Eurodollar CD discount rate falls to 2.105%, what is the gain or loss on the spot position and on the futures position, and the net hedging result?

c. Spot Gain or Loss _____________ Futures Gain or Loss _________________ Net Hedging Result _______________________