As a Treasurer of SemCo Ltd you would like to use currency futures contracts to hedge US$40million that you owe to the supplier in June. A futures quote of £0.74/$ for June delivery is available on International Money Market. The contract size is US$125,000. You decide to take a position in the futures to hedge exposure to the US$. In June the relevant futures contract is trading £0.76/$. Ignoring margin, was it good that you hedged using futures if the spot exchange rate in June is £75/$? How much is the profit or loss on the futures position?

As a Treasurer of SemCo Ltd you would like to use currency futures contracts to hedge US$40million that you owe to the supplier in June. A futures quote of £0.74/$ for June delivery is available on International Money Market. The contract size is US$125,000. You decide to take a position in the futures to hedge exposure to the US$. In June the relevant futures contract is trading £0.76/$. Ignoring margin, was it good that you hedged using futures if the spot exchange rate in June is £75/$? How much is the profit or loss on the futures position?

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter22: International Financial Management

Section: Chapter Questions

Problem 3P

See similar textbooks

Similar questions

A futures trader goes for long position on two (2) CME Australian dollar contracts for AUD100,000 per contract. He purchases the currency futures on day 1 at US$0.7850. The margin required to initiate the trading is 5 percent of the contract value, while the maintenance margin is 80% of the initial margin. The settlement prices are US$0.7877 on day 1 and US$0.7860 on day 2. The prices move to US$0.7800 and US$0.7890 on day 3 and day 4 respectively. Then, the trader has decided to close the position on day 4. Calculate the daily marked-to-market transactions and the changes in the margin account. Determine net profit from the futures trading.
On 25 July of a particular year, an American firm decided to close its account at an Australian bank on 28 August. The firm is expected to have 4 million Australian dollars in the account at the time of the withdrawal. It would then covert the funds to U.S. dollars and transfer them to a New York bank. The September Australian dollar futures contract was priced at $0.7571. Determine the outcome of a futures hedge if on 28th August the spot rate was $0.7237 and the futures rate was $0.7250. All prices are in U.S. dollars per Australian dollar. The Australian dollar futures contract covers 100,000 Australian dollars
Assume that you are running an Australia based company which has an account payable of EUR 125,000 due in three months. You decide to hedge out the associated foreign exchange risk using futures contracts. A futures contract of EUR125,000 is selling at A$1.5410 per euro. Suppose the next three days’ settlement prices are A$1.5399, A$1.5480, and A$1.5410. The initial margin of your performance bond account is $2,000 and maintenance margin is $1,500. What is your margin account balance at the end of the first day and what is the balance of this account at the end of the third day?
On Monday morning, a trader takes a long position in Australian dollars (AUD) future currency contract that matures on Thursday afternoon. The agreed upon price is USD76691/AUD for a currency lot of AUD100,000. A trader needs AUD 175,000. At the close of trading on Monday, the futures price falls to USD0.76620 = 1 AUD. At Tuesday close, the price further falls down to USD0.76602 = 1 AUD. At Wednesday close, the price rises to USD0.76658 = 1 AUD. At Thursday close, the price further rises to USD0.76698 = 1 AUD and the contract matures. The trader takes delivery of the AUD at the prevailing price of USD0.76698 = 1 AUD. What will be the trader’s profit (loss)? Gain of USD 7 Gain of USD 70 Loss of USD 7 Loss of USD 70
Croissant, a french company expects to pay US$1,200,000 to a US supplier in late November. It is now late July, and the current spot exchange rate is €1 = $1.2200. September and December dollar-euro currency futures are currently being traded at $1.2165 and $1.2170 respectively. The company wants to hedge its exposure with currency futures. The Euro futures are available for a standard quantity of 125000 and the tick size is 0.0001.(i) Explain how Croissant might establish a hedge against exchange rate risk.(ii) Suppose that in November when the dollars are paid, the spot rate has moved to 1.2040 and the futures price is 1.2030. Show the outcome of the hedge and calculate the effective exchange rate. (iii) Comment on the basis risk if any.
As a US exporter selling to Europe. You wish to hedge a 1,040,000 Euro to be received in 3 months with futures or forwards. Futures contract sizes for the Euro are 125,000E each. How many dollars will you receive/pay for the goods if you hedge with futures, forwards, and not hedging? Also, rank them? Now End Spot 1.100-01 $/E 1.300-01 $/E Futures 1.120 $/E 1.315 $/E Forwards 1.130-31 $/E
You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding. a. What is the no-arbitrage futures exchange rate? b. Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency.
You work as a trader for the arbitrage desk at RawTrade, monitoring spot and futures foreign exchange rates. At 9am Eastern time you observe the following market prices and rates. The spot exchange rate between US$ and Canadian dollar is $1.1100/C$, while futures price of Canadian dollar for the contract maturing in 6 months is $1.0400/C$. The US 6-month interest rate is 6.5% per annum, while Canadian 6-month interest rate is 3.5% per annum. Both interest rates are based on continuous compounding. What is the no-arbitrage futures exchange rate? Given your answer in part (a) and data provided, describe in detail the arbitrage strategy that will earn profit and calculate your profit, assuming that you can lend or borrow 1000 units of a currency. Will US$/C$ futures exchange rate go up or down? Will US$/C$ spot exchange rate go up or down?
An Indian company has a receivable of USD 100,000 to be collected in one month (June). The manager of the Indian Company decided to hedge its risk through market derivatives. He contacted a Forex trader to check the available alternatives. He was provided the following information: Hedging with a forward contract One-month forward rate: INR/USD= 0.0055 Hedging with a call-option contract Exercise Price: INR/USD= 0,0050 Premium: 5% of the value of the option Contract Size: USD 50,000 Maturity: June Hedging with a put-option contract Exercise Price: INR/USD= 0,060 Premium: 2% of the value of the option Contract Size: USD 100,000 Maturity: June Which derivative is the best for this Indian company if on June the exchange rate is INR/USD= 0.062?
Suppose that the return on a U.K. treasury bill is eight percent annum and the return on a U.S. treasury bill is eight percent annum and that you had $1,000,000 earmarked for short term investment for a period of a month. In which of the securities would you place your money? (Assume you are not a speculator). Show your calculations. 1 British pound (spot)                                                  $1.7748 1 British pound (30-day futures) $1.7776
On January 10, Volkswagen agrees to import auto parts worth $7 million from the U.S. The parts will be delivered on March 4 and are payable immediately in dollars. VW decides to hedge its dollar position by entering into IMM futures contracts. The spot rate is $1.3447/€ and the March futures price is $1.3502. On March 4, the spot rate turns out to be $1.3452/€, while the March futures price is $1.3468/€. Calculate VW’s net euro gain or loss on its futures position.   $13,850 loss  $13,850 gain  $17,850 loss  $17,850 gain
Assume that you are a customer who opened an account with a brokerage firm. Assume today is the 15th May 2010, and you placed orders to buy 1 June Oil Futures Contracts at the newly opened DIFC   Futures Exchange in Dubai which does all deals in USD.   Assume each contract is equal to 1000 barrels of Oman Crude Oil.   Initial Margin per contract is $ 4000 and maintenance margin is also $4000. Your broker purchased each June Futures contract at a price of $62 on the 15th May. Assume settlement price on 15th May is $62 Illustrate the   marking to market process by showing the daily settlement and cumulative balances in your account, assuming the following prices prevailed on the next 5 working days and that you have not withdrawn any money. Next 5 days June Futures Contract Settlement Prices are as follows:   63, 61, 64.5, 66, 65. If you do an offset on the fifth working day at a price of $65, calculate your gain or loss? DIFC OIL CONTRACTS question…