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What is the contract size

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Reference no: EM133067741

Directions:

The sample period for this project is from 10/25/2021 to 11/24/2021 (4.5 weeks). You will need to collect real-time financial data starting from 10/25/2021.

On 10/25/2021, your company receives 3.75 million Euros for selling products in Germany. Currently, the EUR/USD exchange rate is 1.1613. So if you convert this 3.75 mil Euros to USD today, it will be worth $4,354,931. You are extremely happy with the current exchange rate and would take this US dollar value. However, if you convert now, you may have to pay tax today.

Instead, you decide to convert Euros to USD at the end of next month and delay paying the tax. However, this delayed conversion comes with a risk. Since EUR/USD exchange rate fluctuates every day, the US dollar value of your Euros next month 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/execute a strategy today such that the USD value stays close to $4.35 mil throughout the whole sample period. The financial instrument for this project is Euro FX futures contract expiring in Dec 2021 (ticker: /6EZ21 or E6Z21).

1. When you convert 3.75 mil Euros into USD next month, are you "buying" or "selling" Euros? To lock the future exchange rate in this case, should you "long" or "short" Euro FX futures today? Explain.

2. What is the contract size (aka. contract unit) of 1 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?

(Hint: Go to https://www.cmegroup.com (official futures exchange) and locate the Euro FX futures. Check "Contract Specs" tab.)

The rest of this project will confirm whether your actions taken on 10/25/2021 (=answers to Q1/Q2) are indeed the correct hedging strategy at the end. If you don't find sufficient evidence of lowering risk in Q3-Q10, it's likely that your answers to Q1/Q2 are incorrect so revise your answers and solve them again, as necessary.

Reference no: EM133067741

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