ASSIGNMENT - Currency FUTURES

You are an US importer and you are expected to make a payment of £1,035,000 in 2 months' time for the invoice of some products which you bought today from an UK exporter.

You are concerned with exchange rate movements which might result in an effective loss in 2 months' time. You therefore decide to hedge your exposure taking a position on the Euronext Liffe market.

Note: it is assumed that your objective is to cover your exposure.

1. Explain the hedging strategy using future contracts that you could undertake to protect your cash flow from currency fluctuations. Outline 2 other possible strategies for hedging your position indicating advantages and disadvantages for each strategy.

2. Set up a position in futures in accordance with your strategy outlined in (1). Use futures data from

https://derivatives.euronext.com/products/currencies.

3. Eight trading days after you set up the initial position in the futures market, the UK exporter, contacts you and suggests the immediate payment of the invoice against a 10% discount in a prospective future purchase. You have the funds available and you decide to accept the offer and you close your position in the futures market.

Construct the futures' margin account and demonstrate the process of marking to market over the 8 trading days ending with the closing balance on the margin account in the futures market.

4. Calculate the profit/loss on futures and the change in your overall position over those 8 days. Comment on the result elaborating in detail on the effectiveness of your hedging strategy.

• please indicate the actual dates used in your analysis.
• please insert page numbers on your assignment

References - Lecture notes, textbooks, and www.euronext.com

Accessing the Euronext webpage
1. Go to https://derivatives.euronext.com/en/products/currencies. This takes you to the Euronext Liffe Derivatives site

2. Click on the relevant Futures contract

3. At the next page click on settlement prices

4. Clicking on the box below "Trade date" you can access the Futures price for the last 5 days for several delivery months. You will need to return to the page the following days in order to get an additional price.

The important price is under "settle" which is the daily settlement price, i.e the average price at which futures contracts were settled on that day, and it is used for marking to market and reversing trades.

Spot prices
You can find spot prices on several internet sites like the financial times:
http://markets.ft.com/RESEARCH/Markets/Data-Archive or http://fx.sauder.ubc.ca/

Interest rates
Interest rates can also be obtained from several internet sites. If you use the Financial times go to:

http://markets.ft.com/RESEARCH/Markets/Data-Archive.