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Homework 1

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Futures and Options
Homework 1
Due: Wednesday, January 29, 2020
1. Do the following exercises from the book:
Chapter 2: Exercise 2.28, 2.29
2. You have to make a 90,000,000 payment in Japanese Yen on close of business day,
Friday, January 17th. You decide to hedge your risk with the futures contracts.
Assume you that you enter into the futures position at a close of day on Tuesday,
January 14th. Futures and spot data are provided in the file HW1_data.doc. Contract
size is 12,500,000 yen.
a. Describe the position you decide to enter (long or short).
The position that must be considered by looking at the entire scenario would be the long
position as the payment has to be made in Japanese Yen, and would be a need for buying
Yen futures.
b. Describe the contract (what month, and what quantity).
Size of the contract = 12,500,000 Yen
Payment to be made = 90,000,000
Contract = Payment/size of contract = 90,000,000/12,500,000 = 7.2 contract.
Hence by rounding the figure, we can say that there would be 7 contracts
At this point the month should be Mar 20 contract for the reason that it would be the most
liquid contract available and close to the spot price.
c. Document the gain or loss due to marking to market every day that your
position is open.
Tuesday 14
th
0.0090874
Gain/Loss
Wed 15
th
(Loss)
0.0090958
=0.0090958
0.0091828)*7*12,500,000
-7612.5
Thursday 16
th
(Loss)
0.0090839
=(0.0090839-
0.0090958)*7*12,500,000
-1041.2
Friday 17
th
(Loss)
0.0090798
=(0.0090798-
0.0090839)*7*12,500,000
-358.7
Total MTM = 9012.5.
d. What is the total cost in US$ after you have closed out your futures positions,
and made your payment?
Total Cost in US $ after closing out future positions and making payment =
=0.0090798*90,000,000+MTM Loss

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=0.0090798*90,000,000+(-9012.5)
=$808,169.5
e. What would have been the total cost in US$, if you had not hedged? Did you
benefit from hedging?
Without hedging = 0.0090798 * 90,000,000
= $817,182
British Pound
a. Describe the position you decide to enter (long or short).
The position that must be considered by looking at the entire scenario would be the long
position as the payment has to be made in British Pound, and would be a need for buying
Pound futures.
b. Describe the contract (what month, and what quantity).
Size of the contract = 62,500 Yen
Payment to be made = 900,000
Contract = Payment/size of contract = 900,000/62,500 = 14.4 contract.
Hence by rounding the figure, we can say that there would be 14 contracts
At this point the month should be Mar 20 contract for the reason that it would be the most
liquid contract available and close to the spot price.
c. Document the gain or loss due to marking to market every day that
your position is open.
Tuesday 14
th
1.3011
Gain/Loss
Wed 15
th
(Gain)
1.3024
=(1.3024 1.3011)*14*62,500
1137.5
Thursday 16
th
(Gain)
1.3063
=(1.3063 1.3024)*14*62,500
3412.5
Friday 17
th
(Loss)
1.3028
=(1.3028 1.3063)*14*62,500
-3062.5
Total MTM = 1487.5.
d. What is the total cost in US$ after you have closed out your futures
positions, and made your payment?
Total Cost in US $ after closing out future positions and making payment =
=1.3028*900,000+MTM Gain
=1.3028*900,000+(1487.5)
=$1,174,007.5

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Futures and Options Homework 1 Due: Wednesday, January 29, 2020 1. Do the following exercises from the book: Chapter 2: Exercise 2.28, 2.29 2. You have to make a 90,000,000 payment in Japanese Yen on close of business day, Friday, January 17th. You decide to hedge your risk with the futures contracts. Assume you that you enter into the futures position at a close of day on Tuesday, January 14th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 12,500,000 yen. a. Describe the position you decide to enter (long or short). The position that must be considered by looking at the entire scenario would be the long position as the payment has to be made in Japanese Yen, and would be a need for buying Yen futures. b. Describe the contract (what month, and what quantity). Size of the contract = 12,500,000 Yen Payment to be made = 90,000,000 Contract = Payment/size of ...
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