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At 4pm, today, your company receives 12,500,000 Euros. If you convert 12.5 million Euros now, it will be USD 15,3?0,625. You are extremely happy with
At 4pm, today, your company receives 12,500,000 Euros. If you convert 12.5 million Euros now, it will be USD 15,3?0,625. You are extremely happy with this current exchange rate and would take this US dollar value. But if you convert now, you have to pay a super high tax today. Instead, you decide to convert to USD in 2 months and delay paying the tax. This delayed action comes with a big risk. Since EUWUSD exchange rate uctuates every day, the US dollar value of your Euros in future will no longer be the same dollar amount. This risk is called currency risk, aka foreign exchange rate {FOREX} risk. The objective of this project is to design a strategy such that the conversion value stays as close to $15.3?0,525 throughout the whole the sample period. The nancial instrument for this proiect is Euro FX futures contract expiring in lune 2018. 10 Questions [each is worth 1 point, consider each as a rubric): 1. What is the difference between Euro FX futures and Eurodollar futures? Note that this question is not asking the difference between Euro FX and Eurodollar. It's asking the difference between Euro FX futures and Eurodollar futures. 2. What is the contract size of the Euro FX futures contract? What about British Pound futures contract size? Are they the same? 3. What action do you need to take with 6,0018 Euro FX futures today? Specically, Do you have to long or short? How many contracts? Explain why you have to take such position to hedge the currency risk
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