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

$125,000.$

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 $($EUR$/$USD$)=1\mathrm{.}50$

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 $0\mathrm{.}000016.$ The results of

the research also established that on average exbaustion occurs $10$ times in every $200$ 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

$(10$ marks$)$ deternination is to be made is estimated to be $9$ 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

$(4$ marks$)$ variation and maintenance margin in the futures market?

b$)$ Embenezer Limited makes another order to buy raw materials worth $125,000$ from

EuroParts Inc. The payment for this order falls due on the third Wednesday of June $2021$

$4$

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 $($EUR$/$USD$)=0\mathrm{.}6$

Futures Rate $($EUR$/$USD$)=0\mathrm{.}63$

It is now the third Wednesday of June $2021$ and the foreign exchange board shows the

following rates:

Bic

Spot rate $($EUR$/$USD$)$: $0\mathrm{.}643$

Ask

$0\mathrm{.}650$

Advice the CFO of Ebenezer limited whether the Hedge is worthwhile. $(3$ marks$)$

c$)$ Evaluate the assertion by the Minister of Finance that "the country will adopt a no currency

$(3$ Marks$)$ exchange rate regime". Is this possible?

d$)$ Using the data above, as well as assuming that the three$-$month interest rates in the

European Union and Zambia is $6\%$ and $8\%$ respectively. Also assume that the interest rates

in the United States are $3$ percentage point lower than Zambia.

$5$

Determent the basis as well as the futures price ofa euro futures contact whose days to

maturity $(5$ marks$)$ is $90,$ if the Spot rate is pegged at S$($EUROUSD$)=0\mathrm{.}6.$