ASSIGNMENT – Currency FUTURES 30% of final mark
Group Project, 4- 5 members per group
You will have to submit your group assignment by 12am of the 1st of December 2014.
Word Limit: 2500
You are an US exporter and you are expected to receive £925,000 in 3 months’ time for the payment of some products which you sold today to an UK importer.
You are concerned with exchange rate movements which might result in an effective loss in 3 months’ time. You therefore decide to hedge your exposure taking a position on the Euronext Liffe market.
Note: it is assumed that your objective is to cover your exposure.
Explain the hedging strategy using future contracts that you could undertake to protect your receivable from currency fluctuations. Outline 2 other possible strategies for hedging your position indicating advantages and disadvantages for each strategy.
Set up a position in futures in accordance with your strategy outlined in (1). Use futures data from https://derivatives.euronext.com/products/currencies.
Six trading days after you set up the initial position in the futures market, the UK importer, contacts you and suggests the immediate payment of the invoice against a 2% discount in a prospective future purchase. You accept the offer and you close your position in the futures market.
Construct the futures’ margin account and demonstrate the process of marking to market over the 6 trading days ending with the closing balance on the margin account in the futures market.
Calculate the profit/loss on futures and the change in your overall position over those 6 days. Comment on the result elaborating in detail on the effectiveness of your hedging strategy.
please indicate the actual dates used in your analysis.
please insert page numbers on your assignment
References – Lecture notes, textbooks, and www.euronext.com
Accessing the Euronext webpage
Go to https://derivatives.euronext.com/en/products/currencies. This takes you to the Euronext Liffe Derivatives site
Click on the relevant Futures contract (under the Heading: Euro/US Dollar/GBP Contracts)
At the next page click on settlement prices
Clicking on the box below “Trade date” you can access the Futures price for the last 5 days for several delivery months. You will need to return to the page the following days in order to get an additional price.
The important price is under “settle” which is the daily settlement price, i.e the average price at which futures contracts were settled on that day, and it is used for marking to market and reversing trades.
You can find spot prices on several internet sites like the financial times. If you use the financial times website go to: http://markets.ft.com/Research/Markets/Currencies. On the bottom left under “Data Archive” change in the right hand side box “select a report” to “currencies summary”. Select your chosen dates in the appropriate box.
Interest rates can also be obtained from several internet sites. If you use the Financial times go to: http://markets.ft.com/RESEARCH/Markets/Data-Archive. Under “download Data” you can see 3 boxes. Select “Bonds and rates” “Markets interest summary” and your chosen dates.
ASSUME MAINTENANCE MARGIN IS 75% OF INITIAL AND ASSUME THAT THE INITIAL MARGIN PER CONTRACT IS $683 (or its pounds equivalent).
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