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Hi John,
For currency futures questions, in case that we have to convert the hedged amounts in order to calculate the number of contracts, which exchange rate should we use to convert? Should we use current future price, or should we calculate the lock-in rate and use lock-in price?
Also, should we even care about calculating over/underhedged amounts for futures contracts? In the exam questions I have seen so far, the examiner only calculate these unhedged amounts for Options and ignore for futures…. Will we get extra mark for calculating unhedge amounts for futures?
Thank you
It is debatable as to which is the best rate to use to calculate the number of contracts. If you have calculated the lock-in rate because it is needed elsewhere, then this is the best one to use. However, it is only ever likely to make a difference of 1 contract (if at all) and you would not lose marks for that.
With regard to the over/under hedging on futures and options, the most important thing is simply to state that they could use forward rates on any over or under hedge. It is not clear as to whether or not the examiner expects the calculations, but even if he is expecting it then it is unlikely to ever be more than 1 mark.
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