HEDGING YEN USING FUTURE CONTRACT

Facts of the case:-

(a) A USA company is expecting payment of 50 Million Yen from Japan at the
end of March.
(b) In order to cover the risk involved, the company shorts 4
(contracts)September Yen future contracts on March 01.
(c) One contract is for delivery of 12.5 million Yen.
(d) The future price on 01 March is .7800 USD per 100 yen.
(e) The company receives the 50 m in end March and therefore closes out the 4
future contracts on 29 March.
(f) The company is asked by the brokers to maintain the following:-
(i) Initial Margin- $ 1 million per contract.
(ii) Maintaince Margin- $ 7.5 lakh per contract.

Q 1.Complete the Customers Mark to Market Account maintained by the broker

for this customer using following details for the month of March only-
:-

DAY FUTURE PRICE

MARCH 03 0.7670
MARCH 04 0.7220
MARCH 05 0.7810
MARCH 06 0.7650
MARCH 07 0.7450

MARCH 10 0.7560
MARCH 11 0.7110
MARCH 12 0.7290
MARCH 13 0.8000
MARCH 14 0.7980
MARCH 17 0.7810
MARCH 18 0.7780
MARCH 19 0.7890
MARCH 20 0.7980
MARCH 21 0.7800
MARCH 22 0.7810
MARCH 25 0.7780
MARCH 26 0.7970
MARCH 27 0.7910
MARCH 29 0.7990
 SOLUTION

DAILY
FUTURE PROFIT/
DATE PRICE LOSS CUMULATIVE P/L MARGIN A/C PAY
1-Mar 0.7800 In dollars In dollars 4,000,000 3
3 0.7670 650,000.0 650,000.0 4,650,000.0 N
4 0.7220 2,250,000.0 2,900,000.0 6,900,000.0
5 0.7810 -2,950,000.0 -50,000.0 6,850,000.0
6 0.7650 800,000.0 750,000.0 7,650,000.0
7 0.7450 1,000,000.0 1,750,000.0 8,650,000.0
10 0.7560 -550,000.0 1,200,000.0 8,100,000.0
11 0.7110 2,250,000.0 3,450,000.0 10,350,000.0
12 0.7290 -900,000.0 2,550,000.0 9,450,000.0
13 0.8000 -3,550,000.0 -1,000,000.0 8,450,000.0
14 0.7980 100,000.0 -900,000.0 8,550,000.0
17 0.7810 850,000.0 -50,000.0 9,400,000.0
18 0.7780 150,000.0 100,000.0 9,550,000.0
19 0.7890 -550,000.0 -450,000.0 9,000,000.0
20 0.7980 -450,000.0 -900,000.0 8,550,000.0
21 0.7800 900,000.0 0.0 9,450,000.0
22 0.7810 -50,000.0 -50,000.0 9,400,000.0
25 0.7780 150,000.0 100,000.0 9,850,000.0
26 0.7970 -950,000.0 -850,000.0 8,600,000.0
27 0.7910 300,000.0 -550,000.0 8,900,000.0
29 0.7990 -400,000.0 -950,000.0 8,500,000.0

Analysis

If the US sell at 1 march then the amount would be .7800*50 million =

39000000
By this future contact the amount has increased to 39950000(.7990*50
million) sell on 29 march but at the same time he has suffered losses of
950000 by the way of daily trading which can be seen in the cumulative
column So no profit no loss situation . Total cost of the contract is
39950000-950000= 39000000. He can ask the broker to give back the
margin money plus the additional profit =4000000+4500000(8500000).
Q 2. The spot price on 29 March is 0.7990.Compare and analyse the benefits
of Hedging/Spot /future trading in this case.

SOLUTION

Hedging: In the above case the country (US) is selling at the rate of .
7800*50 million YEN on 1 of march and if the country go with the process
of hedging then he has to buy at 1 month spot rate i.e .7990*50 million so
incurred losses of .019*50 million-Rs. 950000 and in order to earn profit he
has to buy at low price.

Spot- The Spot and the future price on 29 march is the same The US can
buy at the prevailing rate -.7990 on 29 march and can sell in future it can be
after 1 month or 3 month what ever the terms of contract. It can avail the
benefit if the future price is greater than .7990 and if go with the forward
contract then the rate must be less than .7990 to gat the benefit of profit.

Future trading – The above case is all about the future trading as it involves
the margin money and the transaction is done through clearing house. Daily
profit and loss is calculated and adjusted in margin