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Embenezer Limited has taken out a futures contract from the Chicago Mercantile Exchange ( CME ) to hedge against a euro payable from EuroParts Inc
Embenezer Limited has taken out a futures contract from the Chicago Mercantile Exchange CME
to hedge against a euro payable from EuroParts Inc for the supply of raw materials used by
Ebenezer Limited in its production process. The size of a single Euro contract at the CME is
Embenezer Limited has adopted the green buck as its functional currency owing to the sudden
instability in its domestic currency the kwacha. As a result of the said instability, the Minister of
Finance at a press conference held two days ago stated that the country will adopt a no curency
policy" and adopt the United Sates dollar as its "national currency". The exchange rate board on
Wall Street today shows the following rates:
S EURUSD
The financial analysts at Embenezer Limited carried out a desk research which revealed that the
variance of daily changes in the price of futures prices is estimated to be The results of
the research also established that on average exbaustion occurs times in every cases.
Required:
a Advice Embenezer Limited on the size of variation margin call of this futures contract they
should expect in their functional currency, if the number of days over which the
marks deternination is to be made is estimated to be days.
a The CFO at Embenezer Limited is confused as to the difference between the variance and
maintenance margins. Assist the CFO with information on the difference between the
marks variation and maintenance margin in the futures market?
b Embenezer Limited makes another order to buy raw materials worth from
EuroParts Inc. The payment for this order falls due on the third Wednesday of June
which is also the maturity date for the euros contract on the Chicago Mercantile Exchange
CME n an attempt to hedge against foreign exchange risk, the Chief Financial Officer
of Embenezer takes out a futures contract from the CME on substantially the same terms
as above save for the maturity date. The spot rate today is quoted as:
Spot Rate EURUSD
Futures Rate EURUSD
It is now the third Wednesday of June and the foreign exchange board shows the
following rates:
Bic
Spot rate EURUSD:
Ask
Advice the CFO of Ebenezer limited whether the Hedge is worthwhile. marks
c Evaluate the assertion by the Minister of Finance that "the country will adopt a no currency
Marks exchange rate regime". Is this possible?
d Using the data above, as well as assuming that the threemonth interest rates in the
European Union and Zambia is and respectively. Also assume that the interest rates
in the United States are percentage point lower than Zambia.
Determent the basis as well as the futures price ofa euro futures contact whose days to
maturity marks is if the Spot rate is pegged at SEUROUSD
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