CURRENCY FUTURES
1
On January 5, an Indian firm exported goods to an US firm for a consideration of $400000
receivable on 15th of February. The spot exchange rate is Rs/$ = 44 and March dollar futures is
trading at Rs/$= 45. Suggest a strategy to the Indian firm to hedge its receivable exposure. On 15th
February if the exchange rate in cash market drops to Rs/$ = 39 and on the same date the March
futures is trading at Rs/$ = 41. Calculate the hedge efficiency. Redo the computations if the spot
exchange rate on 15th February is Rs 47 and the dollar futures are trading on that day at Rs 46. For
computation assume the futures contract size to be $75000.
2
On January 5, an Indian firm imported goods from an US firm for a consideration of $400000
payable on 15th of February. The spot exchange rate is Rs/$ = 44 and March dollar futures is
trading at Rs/$= 45. Suggest a strategy to the Indian firm to hedge its payable exposure. On 15th
February if the exchange rate in cash market drops to Rs/$ = 39 and on the same date the March
futures is trading at Rs/$ = 41. Calculate the hedge efficiency. Redo the computations if the spot
exchange rate on 15th February is Rs 47and the dollar futures are trading on that day at Rs 46. For
computation assume the futures contract size to be $75000.
3
Today is March 1. A UK firm is planning to import chemicals worth $6 million from US. The
payment is due on June 1. The Spot $/£ rate is 1.5765 and the three month forward rate is 1.5685.
LIFFE $/£ futures are trading at 1.5695 explain how the firm can hedge its payable by using
futures. On June 1 the $/£ spot rate turns out to be 1.5875 and June futures price 1.5850 explain
why the futures hedge did not turn out to be a perfect hedge. In retrospect, would a forward
hedge have been better?
XYZ Ltd. is an export oriented business house based in Mumbai. The Company invoices in
customer's currency. Its receipt of US $100000 is due on September 1, 2009. Market information
as at June 1, 2009 is:
Exchange Rates (US$/Rs.)
Spot
1 Month Forward
3 Months Forward
Currency Futures (US$/Rs.)
0.02140
0.02136
0.02127
June
September
Contract Size
0.02126
0.02118
Rs.472000
Initial Margin
Interest Rates in India
June
Rs.10000
7.50%
September
Rs.15000
8.00%
On September 1, 2005 the spot rate US$/Rs. Is 0.02133 and current rate is 0.02134. Comment
which of the
following methods would be most advantageous for XYZ Ltd.
(a) Using forward contract
(b) Using currency futures
(c) Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of the futures
contract.
4
The corporate treasurer of a US multinational receives a fax on 21st February from its
European subsidiary. The subsidiary will transfer 10 million to the parent company on 16th august.
The corporate treasurer decides to hedge the position using currency futures. The available spot
and futures rate of the Euro on the 21st February are:
Spot per euro
September Future euro
December Future euro
US$1.0600
US$1.0000
US$1.600
a. What expiry month will be chosen for the future by the corporate treasurer?
b. Will the corporate treasurer go long or short on the euro future?
c. If the corporate treasurer plans to hedge through futures in the European currency market, will
he buy or sell dollar futures?
d. What is the unhedged and hedged outcome on 16th august, if the spot and futures rate on the
16th august are as follows:
Spot per euro
September Future euro
December Future euro
US$1.0100
US$1.0200
US$1.200