You have to make a 90,000,000 payment in Japanese Yen on close of business day,

ID: 2818869 • Letter: Y

Question

You have to make a 90,000,000 payment in Japanese Yen on close of business day, Friday, September 7th. You decide to hedge your risk with the futures contracts. Assume you that you enter into the futures position at a close of day on Tuesday, September 4th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 12,500,000 yen.

a.Describe the position you decide to enter (long or short).

b.Describe the contract (what month, and what quantity).

c.Document the gain or loss due to marking to market every day that your position is open.

d.What is the total cost in US$ after you have closed out your futures positions, and made your payment?

e.What would have been the total cost in US$, if you had not hedged? Did you benefit from hedging?

f.Repeat steps a) – e) assuming that you expect a payment of 900,000 British pounds on close of business day, Friday, September 7th. Assume you that you enter into the futures position at a close of day on Tuesday, September 4th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 62,500 British pounds.

British Pound Data Daily Settlements for British Pound Future Date: W 09/05/2018 Change Settle Estimated| Prior Day Volume Interest Month OpenHighLoLast Open SEP 18 1.2858 1.29892791.291300411.2903 190,915 245,326 OCT : .288 .299 1.2822 292 t.0041. 2919 736 NOV 181.30151.3015 1.2995 1.2995 +0042 1.2939307 DEC 18 1.2914 .3039B 1.2844A1.2964 |0041.29558,845 JAN 19 MAR 19 1.29321.3055 1.2930 1.3055 +0042 1.3016 646 1,085 13,401 0041 1.2974 20 1,172 Daily Settlements for British Pound Futures Date: Friday, 09/07/2018 Settle Estimatedl Prior Day Volume |Interest Month OpenHighLoLast Change Settle Open SEP 18 2934 1.3032 1.2911 1.2920B -0010 1.2928 150,787234,276 OCT 1 2947 303 .294 .294 .001 2944 274 NOV 181.29751.3042B1.2959 1.29590010 1.2964 DEC 18 1.2976 .3083 1.2965 1.2974.0010 1.298010,935 JAN 19 MAR 19 1.3108 1.3108 1.3100A 13100A0009 1.3042 447 1,055 21,670 40 -.0010 1.2999 1,172 Spot Data: YYYY/MM/DDNdy|USD/GBP udRaxrr 2458366 2018/09/04 Tue 1.2843 2458367 2018/09/05 Red 1.2909 2458368 2018/09/06 Th 1.2938 2458369|2018/09/07|Fri| 1.2943

Explanation / Answer

a. Since we need to receive JPY later, we'll enter into a long contract.

b. As we need JPY 90,000,000 after 3 days, we should take the Sep 18 contract as that would be closest to the spot price and the exact number of contracts which should be taken is 7.2. If we need to only take whole numbers, we should take 7 contracts which should hedge our exposure to the tune of 87,500,000 (12,500,000 * 7).

c. Mark to Market Daily is calculated as the EOD price on EOD - purchase price. Since we don't have 09/06 futures price, we can't calculate MTM for all days.

d. We'll buy 7 Sep 18 contracts @ Open price of 0.0089790 on Sep 05 (Open price on Wednesday is the closing price on Tuesday) and we'll sell that future contract @ close price of 0.0090135 on Sep 07. This will give us a profit of $3,018.75 [(0.0090135-0.008979) * 12,500,000 * 7]. We can then buy JPY 90,000,000 in Spot market @ 0.009018 costing $ 810,162. Adding both, we'll get our net $ cost at $ 807,143.25.

e. If we had not hedged our position, we would have bought JPY in Spot market directly on 07 Sep at a total cost of $810,162. Yes, we benefitted to the tune of $3,018.75 (profit made in Futures market).

f. Since the contract size is GBP 62,500 and we need to hedge a total of GBP 900,000, we can buy 14 contracts (rounded off to the nearest whole number). We'll enter into a long position and will buy the Sep 18 contract as this would be the nearest to our time period.

We'll buy 14 Sep 18 contracts @ Open price of 1.2858 on Sep 05 (Open price on Wednesday is the closing price on Tuesday) and we'll sell that future contract @ close price of 1.292 on Sep 07. This will give us a profit of $5,425 [(1.2858—1.292) * 12,500,000 * 14]. We can then buy GBP 900,000 in Spot market @ 1.2943 costing $ 1,164,870. Adding both, we'll get our net $ cost at $ 1,159,445.

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You have to make a 90,000,000 payment in Japanese Yen on close of business day,

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