fin 431 EXTRA CREDIT

Suppose that the current Bid-Offer on the Euro is $1.21/E and $1.23/E, and the three-month forward is $1.185/E. 1. If you wish to hedge 100,000 Euro Revenue due in three months, what position would you take? Explain why.
a. Buy Euro forward at $1.23/E
b. Buy dollars forward at $1.23/E
c. Sell Euro forward at $1.185/E
d. Sell dollars forward at $1.21/E
e. Buy Euro forward at $1.185/E

2. If the Bid-Offer at maturity is $1.17/E and $1.19/E (assume the bank is following the same quote convention), have you made or lost money by hedging, and how much have you made or lost? Explain why.
a. Loss < $1200
b. Loss > $1200
c. Profit 500 E
d. Profit < $1200
e. Profit > $1200

3. If the average of the Bid-Offer is the spot, which currency is expected to depreciate, and by how much, over the three months? Show your work.
a. Dollar, < 3%
b. Dollar, > 3%
c. Euro, < 3%
d. Euro, > 3%
e. No depreciation

4. If the average of the Bid-Offer is the spot, which currency is depreciated and what was the realized depreciation over the three months? Show your work.
a. Dollar, < 2%
b. Dollar, > 2%
c. Euro, < 2%
d. Euro, > 2%
e. No depreciation

Today is May 2, and Bid and Ask are $1.2100/E and $1.2300/E. The August 21 and September 20 futures contracts are priced at is $1.2500 and $1.2600 respectively. Each contract controls 100,000E. You are receiving 418,000E in Euro revenues on September 9th. Assume that currently, the September 9th forward is $1.2560.

5. How would you properly hedge the revenues using futures contracts? Discuss why, how much you will be over or under-hedged, and the risks.
a. Buy 3 August Euro-futures contracts
b. Sell 3 August Euro-futures contracts
c. Sell 4 September Euro-futures contracts
d. Buy 4 September Euro-futures contracts
e. Sell 3 September Euro-futures contracts

6. If we properly hedge the above revenue, are we over-hedged or under-hedged, and what will cause the hedge to lose money? Explain why.
a. Over-hedged, an appreciation of the