Hedging Exchange Risk with Euro FX Futures Contract

Learn how to hedge exchange risk with Euro FX Futures Contract. Understand the contract size, number of contracts, calculation of margin, and more. Desklib provides a comprehensive guide to finance students.

Running head: FINANCE
Finance
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Table of Contents
1. Explaining the position that needs to be taken for hedging the exchange risk:.....................2
2. Indicating the contract size and number of contracts will be used for hedging the payment:
....................................................................................................................................................2
3. Providing three column spread sheet:....................................................................................2
4. Calculating daily and cumulative returns of future position:.................................................3
5. Providing calculation of margin:............................................................................................3
6. Calculating Unhedged and hedged value of the future contract:...........................................4
7. Plotting hedged and unhedged value, while calculating their standard deviation:................5
8. Indicating whether the strategy hold grounds and lowed the exchange rate risk:.................5
9. Indicating whether Eurodollar can be used as currency derivative, while stating when
companies would use Eurodollar:..............................................................................................6
10. Indicating the derivative options that can be used for investment:......................................6
Reference and Bibliography:......................................................................................................7

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1. Explaining the position that needs to be taken for hedging the exchange risk:
The company can take short position in the futures contract for adequately declining
the risk of converted values, which might affect the performance. Moreover, taking the short
position in the futures contract might eventually help in maintaining profitable conversion
values, if the overall spot prices decline over the period of time. Therefore, Euro FX Futures
need to be shorted.
2. Indicating the contract size and number of contracts will be used for hedging the
payment:
The overall future contract size is mainly at the levels of €125,000.00 for one future
contract. The overall future contract for British Pound futures contract size is mainly at the
level of £62,500.00, while the contract value of Euro FX is at the level of €125,000.00
(Cmegroup.com 2018). Hence, from the overall calculation it can be detected that 90 Euro
FX contract can be shorted today for adequately hedging the future contracts.
3. Providing three column spread sheet:
Date EUR/USD EURO FX Future Price
10/22/201
8 1.14200 1.15170
10/23/201
8 1.13280 1.15170
10/24/201
8 1.13100 1.14355
10/25/201
8 1.12910 1.14075
10/26/201
8 1.12180 1.14545
10/29/201
8 1.13360 1.14345
10/30/201
8 1.13630 1.13845
10/31/201 1.14260 1.13555

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11/1/2018 1.14270 1.14470
11/2/2018 1.14070 1.14225
11/5/2018 1.13870 1.14555
11/6/2018 1.14090 1.14485
11/7/2018 1.13120 1.14905
11/8/2018 1.13440 1.13880
11/9/2018 1.13730 1.13670
11/12/201
8 1.14030 1.12710
11/13/201
8 1.13760 1.12980
11/14/201
8 1.13920 1.13665
11/15/201
8 1.14710 1.13770
11/16/201
8 1.14650 1.14380
4. Calculating daily and cumulative returns of future position:
Date Daily Gains Cumulative Gains
10/22/2018 - -
10/23/2018 - -
10/24/2018 91,687.50 91,687.50
10/25/2018 31,500.00 123,187.50
10/26/2018 (52,875.00) 70,312.50
10/29/2018 22,500.00 92,812.50
10/30/2018 56,250.00 149,062.50
10/31/2018 32,625.00 181,687.50
11/1/2018 (102,937.50) 78,750.00
11/2/2018 27,562.50 106,312.50
11/5/2018 (37,125.00) 69,187.50
11/6/2018 7,875.00 77,062.50
11/7/2018 (47,250.00) 29,812.50
11/8/2018 115,312.50 145,125.00
11/9/2018 23,625.00 168,750.00
11/12/2018 108,000.00 276,750.00
11/13/2018 (30,375.00) 246,375.00

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11/14/2018 (77,062.50) 169,312.50
11/15/2018 (11,812.50) 157,500.00
11/16/2018 (68,625.00) 88,875.00
5. Providing calculation of margin:
Date Margin Account Balance
10/22/201
8 720,000.00
10/23/201
8 720,000.00
10/24/201
8 811,687.50
10/25/201
8 843,187.50
10/26/201
8 790,312.50
10/29/201
8 812,812.50
10/30/201
8 869,062.50
10/31/201
8 901,687.50
11/1/2018 798,750.00
11/2/2018 826,312.50
11/5/2018 789,187.50
11/6/2018 797,062.50
11/7/2018 749,812.50
11/8/2018 865,125.00
11/9/2018 888,750.00
11/12/201
8 996,750.00
11/13/201
8 966,375.00
11/14/201
8 889,312.50
11/15/201
8 877,500.00
11/16/201
8 808,875.00

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There was no margin call issued at any time of the trade window.
6. Calculating Unhedged and hedged value of the future contract:
Date Unhedged Value Hedged Value
10/22/201
8 12,847,500.00 12,847,500.00
10/23/201
8 12,744,000.00 12,744,000.00
10/24/201
8 12,723,750.00 12,815,437.50
10/25/201
8 12,702,375.00 12,825,562.50
10/26/201
8 12,620,250.00 12,690,562.50
10/29/201
8 12,753,000.00 12,845,812.50
10/30/201
8 12,783,375.00 12,932,437.50
10/31/201
8 12,854,250.00 13,035,937.50
11/1/2018 12,855,375.00 12,934,125.00
11/2/2018 12,832,875.00 12,939,187.50
11/5/2018 12,810,375.00 12,879,562.50
11/6/2018 12,835,125.00 12,912,187.50
11/7/2018 12,726,000.00 12,755,812.50
11/8/2018 12,762,000.00 12,907,125.00
11/9/2018 12,794,625.00 12,963,375.00
11/12/201
8 12,828,375.00 13,105,125.00
11/13/201
8 12,798,000.00 13,044,375.00
11/14/201
8 12,816,000.00 12,985,312.50
11/15/201
8 12,904,875.00 13,062,375.00
11/16/201
8 12,898,125.00 12,987,000.00

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7. Plotting hedged and unhedged value, while calculating their standard deviation:
10/22/2018
10/23/2018
10/24/2018
10/25/2018
10/26/2018
10/27/2018
10/28/2018
10/29/2018
10/30/2018
10/31/2018
11/1/2018
11/2/2018
11/3/2018
11/4/2018
11/5/2018
11/6/2018
11/7/2018
11/8/2018
11/9/2018
11/10/2018
11/11/2018
11/12/2018
11/13/2018
11/14/2018
11/15/2018
11/16/2018
12,300,000.00
12,400,000.00
12,500,000.00
12,600,000.00
12,700,000.00
12,800,000.00
12,900,000.00
13,000,000.00
13,100,000.00
13,200,000.00
Ploting Value of Hedged and Unhedged
Unhedged Value Hedged Value
Particulars Unhedged Value Hedged Value
Standard Deviation 69,586.41 111,475.27
8. Indicating whether the strategy hold grounds and lowed the exchange rate risk:
From the overall evaluation it can be detected that the standard deviation values of he
unhedged is relatively low as compared to hedged values. This directly indicates that hedging
measures has mainly secure the organisations transaction. Moreover, the hedging strategy of
selling the future contract has helped in curbing the risk from volatile exchange rate.

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9. Indicating whether Eurodollar can be used as currency derivative, while stating when
companies would use Eurodollar:
Yes, Euro Dollar Futures is also a currency derivates, which are used by companies to
curbing the losses during the currency conversion. For example, if a US company selling
goods to Europe gets payments in EUR, which will have exchange rate risk. Hence,
Eurodollar can be used for curing the losses incurred from currency transaction and minimise
the conversion value.
10. Indicating the derivative options that can be used for investment:
The use of Options on Euro/US Dollar Futures can be conducted, which might
eventually help minimise the risk from declining values and maximise the profit levels. The
option contract relatively allows the organisation to exercise the contract on their will, which
is not possible in futures contract. Hence, buying put option will eventually allow the
organisation to minimise the risk when the values of the EUR/USD declines. However, when
the values of the EUR /USD increase then the company can opt out of the option contract by
paying only the premiums and generating high returns from the rising values (Mensi,
Hammoudeh and Yoon 2015).

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Reference and Bibliography:
Cmegroup.com. 2018. British Pound Futures GBP/USD Quotes - CME Group. [online]
Available at: https://www.cmegroup.com/trading/fx/g10/british-pound.html [Accessed 2 Dec.
2018].
Cmegroup.com. 2018. Euro FX Futures EUR/USD Quotes - CME Group. [online] Available
at: https://www.cmegroup.com/trading/fx/g10/euro-fx_quotes_globex.html [Accessed 2 Dec.
2018].
Finance.yahoo.com. 2018. Yahoo is now part of Oath. [online] Available at:
https://finance.yahoo.com/quote/EURUSD=X/ [Accessed 2 Dec. 2018].
Mensi, W., Hammoudeh, S. and Yoon, S.M., 2015. Structural breaks, dynamic correlations,
asymmetric volatility transmission, and hedging strategies for petroleum prices and USD
exchange rate. Energy Economics, 48, pp.46-60.