Ch. 5) Hedging by Futures Contracts. You hedged your company’s exposure to the EUR depreciation against the USD by entering one unit of December EURUSD foreign exchange futures contract (each EURUSD futures contract with EUR 125,000) at the EURUSD exchange rate 1.1850 on September 27, with the EURUSD spot exchange on that day at 1.1870. On October 7, you discovered that the December EURUSD futures was quoted at 1.1905, and the spot rate for EURUSD on that day was 1.1912. It is now October 8; you observe that the December EURUSD futures is quoted at 1.1915, and the spot rate for EURUSD is 1.1923.
a. What is your hedging position of this EURUSD futures? (3 points)
b. Who may be your counterparty? (2 points)
c. What is the total profit or loss on this futures position as of October 7? (Hint: when you mark a future contract to market, always use the future exchange rates maturing on the same day, not the spot exchange rates.] (6 points)
d. If you deposited the required initial margin, which is $2,800, on September 27, and had not touched the account or gotten any margin calls since making that cash deposit until October 7. The maintenance margin is $2,100. What was your margin account balance on October 7? (3 points)
e. Given all the information from part d, what is the total profit or loss on this futures position as of October 8? (5 points) What is your daily profit or loss on this futures position on October 8? (2 points) What was your margin account balance on October 8 if you do not do anything on your margin account? (3 points) What happens to your margin account and futures position on October 8, and what must you do? (6 points)
f. List three differences between futures and forwards. (6 points)