Foreign Exchange Risk Management Currency futures lecture 3a

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  1. Avatar of tchigbo tchigbo says:
    May 1, 2013 at 4:33 pm

    hey, thanks for making future hedge a lot clearer. i appreciate. However, while solving example 11, you converted $1281.25 into £ using the currency spot selling rate of 1.4812. why did you not use the buying rate of 1.4791 since on the 12 of sept, we will be buying back the £ futures or instead use the currency spot rate of 20th june to convert if we are to stick with selling futures, after all, we were supposed to sell the future on 20th june and buy it back on 12 of sept. please i need for explanation

    • Avatar of johnmoffat johnmoffat says:
      May 1, 2013 at 5:32 pm

      When we ‘buy’ futures we do not actually pay out any cash, and similarly when we ‘sell’ futures we do not receive any cash.
      A futures deal needs a ‘buy’ and a ‘sell’ and (apart from having to pay a deposit (margin) at the start of the deal) the only cash involved is the receipt of the profit (or payment of the loss) at the end of the deal. It is nothing but a gamble or bet on the movement of the exchange rate.

      In this question, at the end of the deal we made a profit on the future of $1281.25 and so we would receive that many $’s. Since we are in the UK we need to sell the $’s to convert to £’s.

      Hope that helps :-)

    • Avatar of Arwa Arwa says:
      May 22, 2013 at 7:21 am

      wow cant believe it ,,, had the same doubt , jumped to the comments and found the answer ! I am impressed ,,,

      thank you John and a big thank you to Open tuition :D

  2. Avatar of gaya s. gaya s. says:
    April 6, 2013 at 4:33 pm

    Very very well explained! Thank you Open Tuition :)

  3. Avatar of nickneouk nickneouk says:
    November 9, 2012 at 11:13 am

    Great lecture thanks. In your example, in order to work out how many contracts are needed you divide by the futures exchange rate but the textbook example (I won’t mention the text) divides by the current exchange rate. Has anyone else spotted suuch an anomally as I know the textbooks can make mistakes sometimes?

  4. Avatar of mavengerelb mavengerelb says:
    April 25, 2012 at 9:31 am

    Brilliant lecture , makes life soo much easier and financial management so much more interesting .

  5. Avatar of freshmint freshmint says:
    April 22, 2012 at 8:58 pm

    Brilliant lecture! One problem that I had was how to decide on whether to buy a future or to sell a future to mitigate the transaction risk. I’ve now learned that buying/selling a futures deal depends on the contract currency. If the contract currency is Pounds, and we are buying Dollars, it means we are SELLING the contract currency, i.e. Pounds, therefore, we SELL futures contracts now.

    Thank you sir, for your wonderful teaching. I am forever grateful!

  6. Avatar of utn9 utn9 says:
    April 18, 2012 at 5:55 pm

    Thanks a lot for the lectures. I got the grip of it.

  7. Avatar of accaforall accaforall says:
    February 21, 2012 at 5:37 pm

    thanks, very helpful indeed

  8. Avatar of anneliese464 anneliese464 says:
    November 22, 2011 at 11:52 pm

    i think i get it….if we make a profit on futures we have to use the “right” rate. if we make a loss we have to used the “left” rate. but i am confused a little bit now, u wrote the “buy” rate of 1.4812 or “buy” rate of 1.5910.
    i thougt if the quote from the bank is 1.4791 – 1.4812, then the first is buy and the second sell…so on profits we should use sell rate and on losses the buy rate.
    hm…i hope that there will be INterest rate futures, not currrency :-) are u also taking the exam P4?? greetings and good luck with ur study!

    • Avatar of estherpang87 estherpang87 says:
      November 23, 2011 at 5:04 am

      Hi there, the 1.5190 is for the Example 9 in the lecture notes. Your interpretation about the buy and sell rate is wrong. 1.4791 is called bank sell rate whereas the 1.4812 is called bank buy rate. lets say we want to sell dollar and buy pound, therefore we will use the bank buy rate for conversion. because we are asking the bank to buy dollar from us as we want to sell it. So the bank will pay us lesser if the bank buy rate of 1.4812 is used. I’m taking P4 this time. Good luck to u

  9. Avatar of estherpang87 estherpang87 says:
    November 22, 2011 at 7:04 pm

    for the previous example 9, it is correct too in the sense that we made profits on futures denominated in dollars, so we would sell $ and buy £, therefore, buy rate of $1.5190 is being used.

    But lets say if we made losses on the futures denominated in dollars, we would then have to make payment in dollars by selling £ and buying $. and thus, sell rate is to be used. Hope you’ll get my point.

  10. Avatar of estherpang87 estherpang87 says:
    November 22, 2011 at 6:54 pm

    Hi there, after seeing your comment, I replay the video lecture. and now, I totally understand the reason why tutor used the buy rate of $1.4812. It’s because we would receive profits on futures denominated in dollars. Then, we would sell $ to buy £.Thus, buy rate of $1.4812 is used. Thanks anyway.

  11. Avatar of estherpang87 estherpang87 says:
    November 16, 2011 at 12:00 pm

    Hi sir, for this example 11, why did u use the buy rate of 1.4812 for converting the profits on futures at the end of transaction date, 12/9? Since the underlying transaction in the cash market on 12/9 is converted at a sell rate of 1.4791, (where we sell pound to buy $), so I personally think that the profits on futures should also be converted at a sell rate of 1.4791, rather than at a buy rate of 1.4812. Please correct me If i am wrong. Thank you sir.

    • Avatar of anneliese464 anneliese464 says:
      November 22, 2011 at 6:29 pm

      I think the same way. This is how it was explained as well in the previous lecture..

    • Avatar of anneliese464 anneliese464 says:
      November 22, 2011 at 6:43 pm

      I thought about it again…we have to pay 500.000 $ therfore on 12. Sept we use the rate 1,4791 -> 338.043 GBP. if we used the other rate of 1,4812 this would be 337.564. As I remember it that it is always the “worst” outcome for us as the bank is gaining, it is logical that we have to use the rate 1,4791 as thus we have to pay more GBP.
      concerning the profit we make a profit of 1.281,25 $. now i am not sure at what rate to convert cause if we use 1,4791 than this is a profit of 866,24 GBP. If we use the rate 1,4812, we would have a profit of 865 GBP. this would be the “worse” outcome for us as we would gain less from converting the $ profit to GBP profit. so perhaps 1,4812 is the right rate? then it was not correct in the previous example

      • Avatar of annalla annalla says:
        August 22, 2012 at 4:03 pm

        @anneliese464,
        For the reason we use the rate 1,4812 to convert because we gain the profit of $1.282,25 at 12 Sep, mean that the money we have at that moment. To convert to GBP, we have to use to selling rate of USD at that time @ 1,4812.

  12. Avatar of kwayu kwayu says:
    June 6, 2011 at 12:02 pm

    why did you use mid spot rate?
    and at the end why did u use 1.4812 insted of 1.4802 if mid rates are in use here?

  13. Avatar of anoshia anoshia says:
    May 28, 2011 at 4:04 pm

    very helpful

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