The portfolio manager of DRW in the Montreal branch is interested in constructing a new portfolio...
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The portfolio manager of DRW in the Montreal branch is interested in constructing a new portfolio in the US market in May 2021. She plans to hold the portfolio for one year. On 17 May 2021, she raises 2,000,000 Canadian dollars (CAD) and converted to 1,490,890.66 USD at the spot exchange rate 1.34148 CAD per USD. In the meantime, she invests in the US equity market using such US dollars. Her quantitative research team estimates that the expected return of the investment in the US market is 14.2% based on past data. In May 2022, the manager convert her investment in the US market back to CAD. In order to hedge unfavorable movement of the USD-CAD exchange rates, the manager asks you to help her manage the currency risk. (a) (2 pt) You identify two financial instruments that can be used to achieve this goal: the USD-CAD forward contract from a bank and the CAD-USD futures contract traded at the CME group. Check the CME's website and answer the following questions: What is the underlying asset of the futures contract? In what currency is the futures price quoted? Is it physically settled or cash settled at maturity? Which date is the last trading day of the May 2022 contract? (b) Table 7 shows the prices of several CAD-USD futures contracts and USD- CAD forward exchange rates for different maturities on 17 May 2021. For each of the futures and forward contracts, calculate the implied continuously compounded interest rate differentials (USD risk-free rate minus CAD risk-free rate, per annum). Table 7: CAD-USD futures prices and USD-CAD forward exchange rate on 17 May 2021. CAD-USD futures USD-CAD forward Contract month Jun ¹21 Jul ¹21 Aug ¹21 Nov 21 Feb ¹22 May ¹22 Price 0.74657 0.74712 0.74742 0.74812 0.74892 0.74937 Term 1M 2M 3M 6M 9M 12M Rate 1.34146 1.34047 1.33994 1.33868 1.33726 1.33645 (c) (2 pt) According to data in Table 7 is the CAD trading at a forward premium or a discount against USD? (d) (4 pts) To hedge using the CAD-USD May 2022 futures contract, should the company take a long or a short position? Estimate the number of contracts needed. (e) (4 pts) Identify two main factors that make the hedging strategy with CAD-USD futures imperfect. The portfolio manager of DRW in the Montreal branch is interested in constructing a new portfolio in the US market in May 2021. She plans to hold the portfolio for one year. On 17 May 2021, she raises 2,000,000 Canadian dollars (CAD) and converted to 1,490,890.66 USD at the spot exchange rate 1.34148 CAD per USD. In the meantime, she invests in the US equity market using such US dollars. Her quantitative research team estimates that the expected return of the investment in the US market is 14.2% based on past data. In May 2022, the manager convert her investment in the US market back to CAD. In order to hedge unfavorable movement of the USD-CAD exchange rates, the manager asks you to help her manage the currency risk. (a) (2 pt) You identify two financial instruments that can be used to achieve this goal: the USD-CAD forward contract from a bank and the CAD-USD futures contract traded at the CME group. Check the CME's website and answer the following questions: What is the underlying asset of the futures contract? In what currency is the futures price quoted? Is it physically settled or cash settled at maturity? Which date is the last trading day of the May 2022 contract? (b) Table 7 shows the prices of several CAD-USD futures contracts and USD- CAD forward exchange rates for different maturities on 17 May 2021. For each of the futures and forward contracts, calculate the implied continuously compounded interest rate differentials (USD risk-free rate minus CAD risk-free rate, per annum). Table 7: CAD-USD futures prices and USD-CAD forward exchange rate on 17 May 2021. CAD-USD futures USD-CAD forward Contract month Jun ¹21 Jul ¹21 Aug ¹21 Nov 21 Feb ¹22 May ¹22 Price 0.74657 0.74712 0.74742 0.74812 0.74892 0.74937 Term 1M 2M 3M 6M 9M 12M Rate 1.34146 1.34047 1.33994 1.33868 1.33726 1.33645 (c) (2 pt) According to data in Table 7 is the CAD trading at a forward premium or a discount against USD? (d) (4 pts) To hedge using the CAD-USD May 2022 futures contract, should the company take a long or a short position? Estimate the number of contracts needed. (e) (4 pts) Identify two main factors that make the hedging strategy with CAD-USD futures imperfect.
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Unfortunately I cannot browse the internet or directly check any websites such as the CME Groups website that might be updated after my last training data in April 2023 as my browsing capability is di... View the full answer
Related Book For
Business and Administrative Communication
ISBN: 978-0073403182
10th edition
Authors: Kitty o. locker, Donna s. kienzler
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