On 3/18/2019, your company receives 50 mil Euros. If you convert this Euros to USD now, it will be worth about $56,626,400. 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 high tax today.

Instead, you decide to convert to USD in 2 months later and delay paying the tax. This delayed action comes with a risk. Since EUR/USD exchange rate fluctuates every day, the US dollar value of your Euros in 2 months 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 close to $56.6 mil throughout the whole sample period. The financial instrument for this project is Euro FX futures contract expiring in "May 2019".

The rest of this project will prove whether your answer to Q1/Q2 is the correct strategy for hedging. If you don't find a sufficient evidence of lowering risk later, it's likely that your answer to Q1/Q2 is incorrect.

1. For every trading day (skip holiday/weekends) during the sample period, collect the EUR/USD exchange rate (from either Bloomberg, Google, Fed, etc) and Euro FX futures price (from CME website above).

1. Date (exclude non-trading days)
2. EUR/USD exchange rate
3. Euro FX futures price

2. In columns E and F, calculate "Daily Gains" and "Cumulative Gains" for your Euro FX futures position in Q1 and Q2. Calculate these values in Excel. Do not manually enter the values. If I don't see Excel calculation behind your answers, I'll assume you copied someone else's answers, which is not acceptable for an individual project. (Hint: Module 1.4. Daily Settlements)

3. Assume the initial margin requirement is $10,000 per contract and the maintenance margin requirement is $8,000 per contract. In column G, calculate the "Margin Account Balance" for each trading day. Is there a margin call at any time? If yes, add the required cash to the margin account to avoid liquidation.

4. In column H, convert 50 mil Euros into USD using the exchange rates in column B. In column I, calculate the values of your "Hedged Value". (Hint: hedged value = unhedged value in H + futures cumulative gains in F).

At this point, your spreadsheet should have the columns (A - I) in the screenshot above.

5. Plot the unhedged values and hedged values in Q6 over time. Calculate the standard deviations of the unhedged values in H. In addition, calculate the standard deviation of hedged values in I.

6. Based on your Q7 answers, did your strategy in Q1 and Q2 successfully lower the exchange rate risk? Explain. (Hint: standard deviation is a measure of risk.)

7. If EUR/USD FX increases in future, the USD value of your Euros will become higher, which will benefit you. Suppose you want to benefit from this positive payoff opportunity but still want to limit the loss against FX drop. Hedging with Euro FX futures will not work for this objective. Instead, which strategy should you use? In addition, which specific financial derivative will your strategy involve? (hint: module 7)

8. Euro FX futures is an example of FX (or currency) derivative. In Module 3, we learned Eurodollar futures. Eurodollar futures may sound similar to Euro FX futures but they are fundamentally different. Why and when will a company use Eurodollar futures? Describe a specific scenario from Module 3 to explain how a company would use Eurodollar futures.