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FIN5545 Currency Futures Project

tag 0 Download 9 Pages / 2,172 Words tag 10-05-2021


Instead, you decide to convert to USD in 2 months and delay paying the tax. This delayed action comes with a big 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 $12,295,000 throughout the whole sample period. The financial instrument for this project is Euro FX futures contract expiring in “December 2018”.

To hedge against the exchange rate risk in your scenario above, should you “long” or “short” Euro FX futures today? Explain. (Hint: converting one currency to another currency is equivalent to buying or selling a foreign currency.)
What is the contract size of the Euro FX futures contract? Is the British Pound futures contract size the same as Euro FX futures? How many Euro FX futures contracts do you need to long/short today?

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

For every trading day (no holiday/weekends) during the sample period, collect the EUR/USD exchange rate (using either Bloomberg, Yahoo, Google, Fed, etc) and Euro FX futures price (using CMEgroup).
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