Universidad del CEMA Master in Finance Research Work ...

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In summary, the broker will pay interest rates to the investor over the traded volume if the investor is buying the currency of the country with higher short-term interest rates than the currency he/she is selling. This difference existing on the payment of the overnight interest rates in the futures market will be discussed in the conclusions section of this research work. Example of a Hedge for the Exchange Rate Risk Since operations at the currency spot FX markets and futures contract have been understood together with its differences and similarities, we will now discuss an example a hedging for the exchange–rate risk. Let’s suppose that today is January 2 nd , 2003 and the USA-based company XXX has an obligation for the amount of EUR 10,400,000 with a European creditor, to be paid off on October 20, 2003. This company wants to hedge the exchange-rate risk, both rising and falling exchange rate fluctuations; therefore, the company would like to hedge the amount in US dollars that it shall have to pay off at the obligation’s maturity date. In order to purchase said hedge, the company decides to compare the advantages and disadvantages of hedging this risk through the currencies futures market versus the leveraged spot Forex market. Data on prices of the EURUSD currency pair. The analysis on the hedges will be made ex-post, therefore, the data which has been used are actual data provided by the Bloomberg source. Spot and Futures Prices of the EURUSD currency pair Chart 1 shows the fluctuation in the futures contracts’ prices of the EURUSD currency pair to expire at December 2003 and the spot price between January 2, 2003 and October 20, 2003. 11
EURUSD Price 1.18 1.16 1.14 1.12 1.1 1.08 1.06 1.04 EURUSD Spot Exchange Rate EURUSD Futures Exchange Rate 1.02 1/2/03 2/1/03 3/3/03 4/2/03 5/2/03 6/1/03 7/1/03 7/31/03 8/30/03 9/29/03 DATE Chart 1: Bloomberg Source The data on the spot FX market corresponds to the closing of each day and this happens every day at 15:00hs NY. This coincides with the opening of the next day’s trading session, since, as we have mentioned before, the currency spot FX market remains open 24 hours a day. The reason why the spot FX market makes a rollover of positions at 15:00hs NY time is to calculate the open positions’ overnight interest rates. In the case of the futures contract, the data provided is that one of that trading session’s closing price. In chart 2, it is shown a Bloomberg screen where the characteristics of the Euro futures contract used for hedging are shown. This data was obtained on November 4, 2003. 12
Page 1 and 2: Universidad del CEMA Master in Fina
Page 3 and 4: The Evolution of FX Markets .......
Page 5 and 6: The Agreement was finally abandoned
Page 7 and 8: Liquidity The daily trading volume
Page 9 and 10: L i = Initial leverage. L i = Volum
Page 11: Therefore, a very important differe
Page 15 and 16: This means that the XXX company wit
Page 17 and 18: ¢ Outcome of Hedge at the obligati
Page 19 and 20: 83.2 contracts * 0.9439 = 78.53 con
Page 21 and 22: Date Spot Futures Debt amount Excha
Page 23 and 24: S 2 = 1.1646 F 1 = 1.0250 F 2 = 1.1
Page 25 and 26: This spot FX market’s advantage e
Page 27 and 28: can see that the spot Forex market

Universidad del CEMA Master in Finance Research Work ...

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