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Hedging Strategies Using Futures and Currency Swaps

See the attached file.

The sample period for this project is from 10/10/2012 to 11/13/2012.

Case 2. At the start of the sample period, you receive 125,000 Euros, which you plan to sell at the end of sample period.

Since the foreign exchange rate fluctuates, the value at the end of the sample period is uncertain. You decide to hedge your spot position by shorting 1 futures contract expiring in December 2012. Your goal is to hedge the risk of your long currency position.

1. Collect daily spot prices (=foreign exchange rates) and currency futures prices for your assigned currency for the entire sample period. Construct a spreadsheet showing both prices for the sample period. See note #1-3 below for details.
2. Calculate the futures margin change and margin balance (assuming 0 initial margin balance) for the sample period.
3. Calculate the values of your unhedged spot position (in $ US), and the values of your hedged position (spot + futures) for the sample period. Calculate the net gain/loss of your spot position and hedged position at the end of the sample period.
4. Calculate the standard deviation of the values of your spot position and your hedged position.
5. Was your hedge successful? What do you mean by a successful hedge?


Solution Preview

See the attachment.

At the beginning of the period, we sell a futures contract for amount equal to our starting position. We start with 125,000 EUR, which at the futures price as of 10/10/12 is 1.2905*125,000.

1) The prices you had labeled as Spot Price seemed to be futures prices, according to the given website. I ...

Solution Summary

The solution discuses hedging strategies using futures and currency swaps.