FIN 5535 Project: Currency Hedge

The sample period for this project is from 1/13/2015 to 2/20/2015.
At the start of the sample period, you receive 2,500,000 Euros, which you plan to sell at the end
of sample period for tax reasons.
Since the foreign exchange rate changes every day, the US dollar value of your foreign
currency at the end of the sample period will be uncertain. Your objective is to reduce this
exchange rate risk. You decide to hedge this risk using EUR/USD (=Euro FX) futures contract
expiring in March 2015.
10 Questions (each is worth 1 point):
1. Why do we use March 2015 futures instead of February 2015 futures?
2. What is the contract size of EUR/USD futures contract?
3. How many futures contract do you have to buy or short to hedge the risk? Specify explicitly
whether you are buying or shorting.
4. For every trading day (no weekends/holidays) during the sample period, collect the daily
EUR/USD exchange (spot) rate and EUR/USD futures price. See hint #2 for how to collect
historical futures prices. Construct a spreadsheet showing both prices. See hints below for
details.
5. Assume the initial margin requirement is $3,000 per contract. Calculate how much you have
to add to the margin account initially.
6. Calculate the futures daily gains, cumulative gains and the margin account balances for
the entire sample period. Is there a margin call, when the maintenance margin requirement is
$2,400 per contract? If yes, add the required cash to the margin account.
7. Calculate the values of your unhedged (=spot) position (2.5mil Euros in US $), and the
values of your hedged position (= unhedged value + futures cumulative gain).
8. Plot the unhedged values and hedged values in Q7 over time. Compare and discuss these 2
plots.
9. Calculate the standard deviation of the unhedged values and that of the hedged values in Q7.
Compare and discuss the 2 standard deviations.
10. Using Q8 and Q9 answers, confirm that you successfully reduced the exchange rate risk.
Hints:

1. Your spreadsheet must include at least the following columns for each trading date: Date,
EUR/USD exchange rate, Futures price, Futures daily gain, Cumulative gain, Margin account
balance, Unhedged value and Hedged value (= unhedged value + cumulative gain).
2. Use http://www.cmegroup.com/ (where futures contracts are traded) to locate the EUR/USD
futures and collect the futures prices. The screenshot below shows that the EUR/USD futures
price on 12/22/2014 was 1.2239.

3. You can use any resource such as Bloomberg, google or yahoo to collect the EUR/USD
exchange rate. However, using a resource with 4 decimal points will give you the best results
showing a successful hedging.
4. As of 1/8/2015, 2.5 mil Euros is worth $2,963,387.50. If your unhedged values are very
different from this number, check your data and calculation again.
5. How to calculate futures gain is explained in page 26-27 or review Week 1 class/chat