It is June and you currently manage a $100 million (equivalent) portfolio of Chinese stocks, all of which are priced in renminbi. You are bullish on the Chinese stock market in local currency terms, and you expect your portfolio to rise by 5% by September of this year, but you are concerned the renminbi might weaken against the dollar. You consider using futures contracts on the renminbi as a hedge. You have the following information:

Spot RMB/USD exchange rate: 6.5380 September forward exchange rate: 6.5691

September contract specifications: Amount: 1,000,000 renminbi Latest price: .15223 Minimum price fluctuation: $.00001 per renminbi increment (i.e., $10 per contract) Initial margin (per contract): $3,000 Maintenance margin (per contract): $2,250

a) Based upon your expectation for your portfolio, how many RMB futures contracts should you use if you wished to hedge fully the currency risk of your portfolio? Would you buy or sell these contracts?

b) As the expiration of the September contract approaches, the RMB has actually strengthened by one half of one percent (0.50%) against the USD from its spot price back in June. Assuming the RMB appreciated by no more than that amount prior to reaching this September value, would you have been likely to have received a margin call on your futures position? Briefly explain your answer.