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Say the contract currency is in GBP and company is due to receive $ in dec.
So, we should open the position by buying GBP currency futures now.
In calculating the number of contracts to buy, since the amount receivable is in $, we need to convert it to the GBP equivalent. My question is this – what rate do we use to convert the $? The current spot rate? Or the current futures rate?
Kaplan study text and Bob Ryan’s book uses the current spot rate, but opentuition notes and online lecture uses the current futures rate.
Thanks.
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Hopefully you will passed the june 2010, and you may not need to read this, i guess this will help other
I would go with “current spot rate” and my understanding is : while you’re planning to hedge the december dollar receipt “now”, you’re not aware of the future rate (possibly you may work out the forward rate i.e future rate ) and you’re trying to establish that how many number of contracts you need to buy or sell at present from the bank.
however, if you may also applied the future current rate (forward rate)to calculate the number of contract, there will not be huge difference in the number of contracts a(s you must need to round them off (say 2.9 contracts = 3 contract)- as bank never signed off the half contracts ( the trading certificates)
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