1. Select a foreign currency you want to speculate for or against. Do not select a currency that is on fixed exchange rate regime, such as Cuban peso. Use standard end of the trading day market quotes for exchange rates, such as those listed in the Wall Street Journal. Do not use ask-bid type of quotes. NOTE: In selecting a target foreign currency consider a country, where you traveled to or plan to travel. That will give you a better handle and/or motivation to learn about this currency. Submit your chosen currency by the end of Monday, May 24.
2. Based on your preliminary analysis, decide whether this currency is going to appreciate (go up) or depreciate (go down) against the dollar from May 14 to June 4, 2021.
3. If you think it will appreciate, you must take a long position and use your $1,000,000 to buy this currency in order to sell it at the end of the holding period and make a profit.
4. If you think the opposite will happen, you must take a short position, borrowing the foreign currency today against your $1,000,000, selling it immediately and hoping to repay the loan at the end of the period by buying up the foreign currency at a cheaper rate.
5. Follow the fluctuations of your currency exchange rate against the dollar using The Wall Street Journal, or any other official source. Enter these data in a statistical table and draw a graph.
6. At the end of the period, figure out how much you have lost or gained in your speculation. Annualize the returns.
7. Provide a short commentary about the behavior of your currency and list any identifiable reasons for its fluctuations. NOTE: In the speculation part of your currency project (SECTIONS 1-7), you need not take into account any currency exchange fees, interest that would be due on the borrowed foreign currency, or any other transaction cost.
8. Based on what you’ve learned in your speculation steps (1) through (7) describe how you would use forex forward markets to HEDGE currency risk for an export or import transaction worth $1,000,000. For example, how would you hedge currency risk being a US exporter of bourbon or importer of autos?
Assume that the time gap between the signing of your trade contract and payment is three months and that during that period a foreign currency in question experiences a major unexpected appreciation or depreciation (say, 10-20%).
Assume that the 3-month forward rate for a foreign currency is equal to its spot rate. Describe your choices for hedging and provide estimates of its benefits and costs. Express the costs of hedging as a percentage of the total volume of your export/import transaction and in $$. For a forward contract assume the upfront fee of 1.5%, for an option assume a fee of 3-4%. If you need to use data for interest rates, use the US prime rate vs. the equivalent rate of a foreign country.
