Question

1. You expect to receive 40,000,000 Japanese Yen on close of business day, Friday, January 18th. 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 15th. Futures and spot data are provided in the file HW1_data.doc. Contract size is 12,500,000 yen.
2. 1. Describe the position you decide to enter (long or short).
3. 2. Describe the contract (what month, and what quantity).
4. 3. Document the gain or loss due to marking to market every day that your position is open.
5. 4. What is the total cost in US$ after you have closed out your futures positions, and made your payment?
6. 5. What would have been the total cost in US$, if you had not hedged? Did you benefit from hedging?
7. f.What was the effective cost per JPY
8. 7. What would have been the total cost in US$ if you could have bought (or sold) a contract for exactly the amount you wanted to hedge (40,000,000 Yen)?
9. 8. Identify problems with your hedge. When do you think it is useful to hedge using futures and when it is not?

Japanese Yen Futures Data

Japanese Yen Data

Daily Settlements for Japanese Yen Future (FINAL)Trade Date: Wednesday, 01/16/2019

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
FEB 19	92455	92500	91850	91850	-290	92060	525	787
MAR 19	92480	92730	92025	92115B	-290	92265	103,346	225,891
APR 19	92760	92860B	92340A	92340A	-290	92500	1,745	1,451
MAY 19	-	93080B	92560A	92560A	-290	92710	0	28
JUN 19	93300	93345B	92750	92750	-295	92970	36	901
SEP 19	-	-	-	-	-300	93690	0	110

Settlements for Japanese Yen Futures (FINAL)Trade Date: Friday, 01/18/2019

Month	Open	High	Low	Last	Change	Settle	Estimated Volume	Prior Day Open Interest
FEB 19	91730	91820B	91240	91320B	-445	91300	403	675
MAR 19	91980	92115	91405	91500	-445	91500	111,197	217,141
APR 19	91930	92240B	91720A	91740B	-445	91730	358	563
MAY 19	-	92460B	91940A	91960B	-450	91940	0	148
JUN 19	92595	92700B	92190A	92225	-450	92200	169	1,012
SEP 19	-	-	-	-	-440	92920	0	110

Spot data:

Jul.Day	YYYY/MM/DD	Wdy	USD/JPY
2458499	2019/01/15	Tue	0.0092115
2458500	2019/01/16	Wed	0.0091863
2458501	2019/01/17	Thu	0.0091771
2458502	2019/01/18	Fri	0.0091176

Answer 1

a) Since we want to profit from an upward price move and hedge the downside risk of movement in US currency/Japanese currency, we should take a long position in futures ( enter into buy-to-open order).

b) As each contract is of 12,500,000 yen, we would enter into 3 (40 mn/12.5 mn = 3.2 ) contracts only, the nearest no. to 3.2. We should go for February contract, nearest month for which futures is available, as we want to minimize interests and financing costs.

c) Change in futures value on daily basis:

Day	Close/ Settle	Previous close/ Settle	Change for 10,000,000 yen( Mark to Market)	Loss on 3 contracts of 12,500,000 yen
16 Jan 2019	92060	92060-(-290)= 94150	-290	=290 X 3 X 12,500,000/ 10,000,000=$ 1087.5
17 Jan 2019	91745	92060	-315	= 315x 3 x12,500,000/ 10,000,000 =$ 1181.25
18 Jan 2019	91300	91300-(-445)=91745	-445	= 445x 3x 12,500,000/ 10,000,000 = $1668.75

d) Total effective cost : Cost of entering in future - Value of futures at exit

= 12.5 mn Yen*3 * 94150 $ / 10 mn Yen - 12.5 mn Yen*3 * 91745 $/ 10 mn Yen

= 37.5 x ( 94150- 91745 ) = $ 90187