1. Determine the percentage change in the currency's value over the period studied Initial spot Final spot % change 1.246050 1.241110 -0.40% 1a. Determine the percentage change in the futures contract over the period. Compare these two numbers. Futures price (beg) Futures price (end) % change 1.248550 1.243950 -0.37% Futures moved less than spot 2. Assume that on the day of DC1, you had contracted to purchase imports, which would require you to pay 1 million units of the currency on the day of DC2. (Students selecting JPY must use 100,000,000 units for this question and for the following questions. Students selecting CNY must use 10,000,000 units for this question and for the following questions) a. If you had hedged your position with a forward hedge, how many dollars would you have paid for the goods as of the end of the period? Initial spot Total cost Fwd points Unit cost b. If you had hedged your position with a futures hedge, how many dollars would you have paid for the goods as of the end of the school term? Final spot Futures price (beg) Total cost (before CME costs) Futures price (end) Unit cost Total cost c. If you had hedged your position with a call option hedge, how many dollars would you have paid for the payables as of the end of the period? Answer for the ITM, ATM and OTM call options. Please consider a cost of capital for the firm of 8% when you estimate the "total" premium paid and a 360 day convention. Please remember that quotes for option premiums and the strike price for the options differ among currencies. Some of them will require different adjustments (divide by 100, divide by 1 or divide by 10000). Be very careful when you calculate the total $ cost per unit Final spot Cost of capital # days ITM Option price (beg) Total cost (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Total cost ATM Option price (beg) Total cost (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Total cost OTM Option price (beg) Total cost (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Total cost d. Assume that you used a money market hedge at the beginning of the school term by borrowing USD at the LIBOR rate + 2%, converted into the foreign currency and invested at the LIBOR rate for the foreign currency to obtain enough money to pay for the account payable. How many dollars would you have to pay on the loan at the end of the school term? Int rate Time (in days) Units of foreign currency needed Total cost Equivalent in USD to borrow Loan amount + interest Int rate e. If you did not hedge, how many dollars would you have paid for the goods as of the end of the school term? Final spot 0.009062 Total cost f. Fill out the table below Strategy used for payables Unit cost Total dollar amount paid before commissions Total cost after considering CME fees Forward hedge Future hedge Call options hedge (ITM) Call options hedge (ATM) Call options hedge (OTM) Money market hedge No hedge Consider that trading one futures contract and trading one option contract costs you $7.50. In order to calculate the total commission you need to know how many contracts need to be traded. Please check the size of the futures contract and report the number of contracts required in the transaction. 3. This question connects with the forecast obtained in Fxstreet Assume that the hedging decision depended on the forecast of the currency from FX street. If ALL analysts suggest thatforeign currency is going up, then you want to hedge 100% of the payables. If ALL analysts suggest that foreign currency is going down, then you will play it conservatively and only hedge 25% of the exposure. You can choose to hedge a fraction of the amount based on the number (%) of analysts expecting an increase. Select the level and calculate the profit/loss for each hedging technique compared to the unhedged position (no hedge case). Pair movement that hurts us # analysts expecting such movement Amount to leave unhedged # forecasts avaiable Amount to hedge Percentage to hedge Cost of payables if left unhedged Unhedged cost Hedged cost Total P/L Forward hedge Future hedge Call options hedge (ITM) Call options hedge (ATM) Call options hedge (OTM) Money market hedge Which alternative was best in this case? Was your forecast useful? 4. Assume that as of the beginning of the school term, you had contracted to sell exports, which would result in your receiving 1 million units of the foreign currency at the end of the school term. a. If you had hedged your position with a forward hedge, how many dollars would you have received for the goods as of the end of the school term? Initial spot Total revenue Fwd points Unit price b. If you had hedged your position with a futures hedge, how many dollars would you have received for the goods as of the end of the school term? Final spot Futures price (beg) Revenue (before CME costs) Futures price (end) Transaction costs Unit price Net revenue c. If you had hedged your position with put options, how many dollars would you have received for the goods as of the end of the school term (account for the premium that you paid for the put option)? Answer for the ITM, ATM and OTM put options. Please consider a cost of capital for the firm of 8% when you estimate the "total" premium paid. Please remember that quotes for option premiums and the strike price for the options differ among currencies. Some of them will require different adjustments (divide by 100, divide by 1000 or divide by 10000) Be very careful when you calculate the total $ received per unit Final spot Cost of capital # days ITM Option price (beg) Revenue (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Net revenue ATM Option price (beg) Revenue (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Net revenue OTM Option price (beg) Revenue (before CME costs) Total premium Option price (end) Transaction costs Unit cost (before commission) Net revenue d. Assume that you used a money market hedge at the beginning of the school term by borrowing foreign currency at the LIBOR rate + 3%, converted into USD and invested in the business at an annual rate of 8%. How many dollars would you "receive" at the end of the school term? Int rate Time (in days) Units of foreign currency received PV of revenue Equivalent in USD to deposit Amount received + "interest" Int rate e. If you did not hedge, how many dollars would you have received for the goods as of the end of the school term? Final spot 0.009060 Total revenue f. Fill out the table below Strategy used for receivables Unit price Total dollar amount received Amount received after CME costs Forward hedge Futures hedge Put options hedge (ITM) Put options hedge (ATM) Put options hedge (OTM) Money market hedge No hedge Consider that trading one futures contract and trading one option contract costs you $7.50. In order to calculate the total commission you need to know how many contracts need to be traded. Please check the size of the futures contract and report the number of contracts required in the transaction. 5. This question also connects with the FXstreet forecasts and the hedging decision depends on the number of analysts projecting an adverse movement.

If ALL analysts think the foreign currency is going up, then you want to hedge the lowest amount possible of the receivables, which is 25% If the forecasts suggest the foreign currency is going down, then you will definitely want to hedge 100% of the exposure. You can vary your amount to hedge based on the number (%) of analysts expecting an adverse movement. Select the hedging level and calculate the profit/loss for each hedging technique. Compare to the unhedged position (no hedge case) and determine what strategy was the best.

Pair movement that hurts us # analysts expecting such movement Amount to leave unhedged # forecasts avaiable Amount to hedge Percentage to hedge Amount received if left unhedged Unhedged revenue Hedged revenue Total P/L Forward hedge Future hedge Put options hedge (ITM) Put options hedge (ATM) Put options hedge (OTM) Money market hedge Value created Which alternative was best in this case? Was your forecast useful? 6. What have you learned about the different hedging methods? Compare MM hedge and forward hedge. Compare forward hedge and futures hedge. Compare options and futures. Which is easier to use? Which is riskier? Which has a higher initial cost?