258 CHAPTER 6. THE MARKET FOR CURRENCY FUTURES
- On the morning of December 6, you purchased a futures contract for oneeur
at a rate ofinr/eur55. The following table gives the subsequent settlement
prices and the p.a. bid-ask interest rates on ainrinvestment made until
December 10.
(a) What are the daily cash flows from marking to market?
(b) What is the total cash flow from marking to market (ignoring discount-
ing)?
(c) If you must finance your losses and invest your gains from marking to
market, what is the value of the total cash flows on December 10?December 6 7 8 9 10
Futures price 56 57 54 52 55
Bid-ask interest rates,
inr, %p.a.12.00-12.25 11.50-11.75 13.00-13.25 13.50-13.75 NA- You want to hedge theeur value of acad 1m inflow using futures con-
tracts. On Germany’s exchange, there is a futures contract forusd100,000 at
eur/usd1.5.
(a) Your assistant runs a bunch of regressions:
i. ∆S[EUR/CAD] =α 1 +β 1 ∆f[USD/EUR]
ii. ∆S[EUR/CAD] =α 2 +β 2 ∆f[EUR/USD]
iii. ∆S[CAD/EUR] =α 3 +β 3 ∆f[EUR/USD]
iv. ∆S[CAD/EUR] =α 4 +β 4 ∆f[USD/EUR]
Which regression is relevant to you?
(b) If the relevantβwere 0.83, how many contracts do you buy? sell?- In the previous question, we assumed that there was ausdfutures contract in
Germany, with a fixed number ofusd(100,000 units) and a variableeur/usd
price. What if there is no German futures exchange? Then you would have to
go to a US exchange, where the number ofeurper contract is fixed (at, say,
125,000), rather than the number ofusd. How manyusd/eurcontracts will
you buy? - A German exporter wants to hedge an outflow ofnzd1m. She decides to hedge
the risk with aeur/usdcontract and aeur/audcontract. The regression
output is, with t-statistics in parentheses, and R^2 = 0.59:
∆S[eur/nzd] = a + 0.15 ∆f[eur/usd] + 0.7 ∆f[eur/aud]
(1.57) (17.2)(a) How will you hedge if you use both contracts, and if ausdcontract is for
usd50,000 and theaudcontract foraud75,000?