1. When you are converting 100 mil Euros into USD next month, are you buying or selling...

Fantastic news! We've Found the answer you've been seeking!

Question:

1. When you are converting 100 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 the 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?

3. For every trading day (skip holiday/weekends) during the sample period, collect the EUR/USD exchange rate (from either Bloomberg, Google, Fed, etc) and Euro FX futures price (from CME website above).

4. In columns E and F, calculate "Daily Gains" and "Cumulative Gains" for your Euro FX futures position in 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. (To review how to calculate daily and cumulative gains, see 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 100 mil Euros into USD using the exchange rates in column B. 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. Calculate the standard deviations of the unhedged values in H. In addition, calculate the standard deviation of hedged values in I.

8. Based on your Q7 answers, did your strategy in Q1 and Q2 successfully lower the exchange rate risk? Explain. (Hint: standard deviation is a measure of risk.)

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. Hedging with Euro FX futures will not work for this objective. Instead, which strategy should you use? In addition, which specific financial derivative will your strategy involve? (hint: module 7)

10. Euro FX futures is an example of FX (or currency) derivative. In Module 3, we learned Eurodollar futures. Eurodollar futures may sound similar to Euro FX futures but they are fundamentally different. Why and when will a company use Eurodollar futures? Using a specific scenario from Module 3 and discuss how a company would use Eurodollar futures.