Scribd
Upload
99 views

FRM Assignment: Submitted By: Mukesh Sahu (NMP22) Manush Maken (NMP19) Abhishek Sinha (NMP39)

- The document is an assignment submission containing multiple questions on currency futures, forward contracts for hedging currency risk, and calculating futures prices based on cost of carry and convenience yield. - It includes calculations of futures prices for different currency and expiration dates, and analyses of how an importer could use forward contracts to hedge currency risk on a purchase. - It also discusses the benefits and risks of forward hedging, and calculates the potential realization in rupees if a firm hedges a receivable using forward contracts.

Uploaded by

Mukesh Sahu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
99 views

FRM Assignment: Submitted By: Mukesh Sahu (NMP22) Manush Maken (NMP19) Abhishek Sinha (NMP39)

- The document is an assignment submission containing multiple questions on currency futures, forward contracts for hedging currency risk, and calculating futures prices based on cost of carry and convenience yield. - It includes calculations of futures prices for different currency and expiration dates, and analyses of how an importer could use forward contracts to hedge currency risk on a purchase. - It also discusses the benefits and risks of forward hedging, and calculates the potential realization in rupees if a firm hedges a receivable using forward contracts.

Uploaded by

Mukesh Sahu
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 4

FRM Assignment

Submitted by:
Mukesh Sahu (NMP22)
Manush Maken (NMP19)
Abhishek Sinha (NMP39)

Assignment

Submission Deadline: 09.00PM Nov 01, 2014

1. At MCX-SX currency futures in US dollar are traded. Today is 12 December and January
futures would expire on 28 January. Spot rate in the exchange market for dollar is Rs.
45.45. The yields in the T-bills markets of India and USA are 5.90% and 2.40% respectively.
a. At what price January futures would be traded?
b. What would be the price of February futures if its expiry is on 24 February?
Ans:

(a) Given S0=45.45, Rd=5.90%, Rf = 2.40%, and t= 47 days (From 12 December to 28


January)
F =S0* e^(rd-rf)t = 45.45* e^(0.059 -0.024)47/365 = 45.6552
(b) For February futures, the time to expiry would be 47+27=74 days. The price of
February futures would be:
F= S0* e^(rd-rf)t = 45.45* e^(0.059 -0.024)74/365 = 45.7736
2. In June an Indian importer buys a machine at US $50, 000. Payment is due after six
months in December. The spot exchange rate is Rs. 45.5625 while December futures is
trading at Rs. 46.6500 indicating an appreciation of dollar by about 2.4% in six months.
The importer feels that dollar will appreciate much more. What shall he do? Assume
futures contract in rupees are available for $1,000.
Ans:

Number of contracts bought by importer= (Exposure amount)/ (Value of one


contract)= 50000/1000= 50
Suppose the USD appreciates to 48.5000 and a futures contract sells for 48.6500
The importer exits the futures contract at 48.6500 and buys foreign currency in the
spot market at the prevailing spot rate.
Cost= 50,000*48.5000= 24,25,000
Sell 50 future contracts booked earlier at 48.6500;
Net gain on futures (48.6500-46.6500)* 50,000= 1,00,000

Net rupee amount paid 24,25,000- 1,00,000= 23,25,000


Effective exchange rate= (23,25,000/50,000)= 46.5000
As against the spot price of 48.5000, the importer effectively buys dollars at
46.5000.
When the US dollar depreciates to 45.5000 and a futures contract sells for
45.6500
Cost= 50,000*45.5000= 22,75,000
Sell 50 future contracts booked earlier at 45.6500;
Net gain on futures (46.6500-45.6500)* 50,000= 50,000
Net rupee amount paid 22,75,000+ 50,000= 23,25,000
Effective exchange rate= (23,25,000/50,000)= 46.5000
As against the spot price of `45.5000, the importer ends up buying dollars at
46.5000.
Hence irrespective of appreciation or depreciation of the US dollar, the effective
cost of buying dollars remains close to the opening futures price, 46.6500.

3. Multiplex Ltd. has exported copper castings worth $ 10 million for which the payment is due after
3 months. The firm has projected profits assuming the current spot rate of Rs. 45 / $. Though US
dollar has been appreciating for the last one year, there is anticipation of decline in its value in
coming days. The following rates are quoted by the bank.
Quote
Spot (Rs./$)
3 months forward

Bid
52.00
52.50

Ask
52.35
52.90

a. Should Multiplex Ltd. hedge its receivable using forward contracts?


b. What are the benefits and risks in forward contracts for Multiplex Ltd?
c. What realization could be made in Indian Rupees if it decides to hedge?
Ans:

a) Since there is an expected decline in the market value of the USD, Multiplex
Ltd should book a 3m-forward contract for its payment with a short
position(52.5/$) .
b) Benefits:
3m-forward bid rate: Rs 52.5/$
Firm assumed spot rate: Rs 45/$
Gain= (52.5-45)*10 mill= Rs 75 mill
Risk
If the dollar rate goes down to (45-7.5) i.e. Rs 37.5/$, then the firm would be
at risk of losing money.

c) Cash flow after hedging= 52.5*10 mill= 525 million rupees


4. Explain carefully the relationship between convenience yield and cost of carry. Assume that the
risk-free interest rate is 9% per annum with continuous compounding and that the dividend yield
on a stock index varies throughout the year. In February, May, August, and November, dividends
are paid at a rate of 5% per annum. In other months, dividends are paid at a rate of 2% per
annum. Suppose that the value of the index on July 31 is 1,300. What is the futures price for a
contract deliverable in December 31 of the same year?
Ans:

Total cost of carry= risk free rate+ storage cost rate- convenience yield
Convenience yield measures the extent to of the benefits obtained due to physical
ownership or storage of the commodity which the future contracts owners dont
get.
R= 9/12*5= 3.75%
Q= (5*2/12) + (2*3/12)= 1.33%
F= S*e^(r-q)t= 1300*e^(.0375-.0133)*1= 1300*1.0245= 1331.84

You might also like