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Suppose you and your group members are a team in the Risk Management Department of Bank One responsible for formulating hedging strategy for the banks net exposure in foreign currencies.

You are working in a US-based institution with some assets and liabilities.

Your manager asks your team to write a brief report about how to hedge the current Forex exposure according to each question.

Hints:

Your manager is very busy. This is the culture of your department to keep the report length (in words) not over 1.5 A4 pages, 1.5 lines as spacing, with proper sub-section headings that can facilitate your V.P.s reading for the two questions.

All figures and tables (e.g. screen captures of Excel data table and regression running resultetc) should be attached as appendices.

Your manager concerns very much about the quality and clarity of analysis, argument and justification in the report. He likes double checking your calculation and therefore you are expected to show your calculation steps.

The content of your report should include, but not limited to, the followings for each question:

• Net exposure of the bank for that currency
• The expected loss/gain of the bank in US$ if the FX rate moves to the level as specified in each question.
• Analysis and decision of Futures hedging strategy, including the selection of the suitable future contract, determination of position of the future contract, and the application of regression analysis of hedge ratio (based on the range of historical data that are provided), R² , number of the futures contract for hedging,etc Extract the historical data in that you use in the hedge ratio regression analysis in proper Excel format and attached as a onepage appendix;
• Show as appendix your regression analysis output tables
• You do not need to consider other costs or expenses in your above report

• So you need to identify and calculate the following and present to your manager for the report.
• Net exposure and risk exposure identification
• Loss / Gain estimation under no hedging
• Selection of futures and determination of number of contract
• Hedge ratio analysis
• Screen captures required; Good use of subheading

The data are provided to you by your staff, you are required to study the data and they are the FX rate of Spot GBPUSD, USDJPY, USDSGD, and the future prices and the contract size. You need to study the FX rate and see how you should prepare the data for analysis.

Question 1

Your bank has British assets of GBP18,000,000 and British liabilities of GBP10,000,000. The expected FX rate in indirect quote will be 0.90 in the future.

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