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For some reason my brain just doesn’t click into gear when it comes to determining whether I am buying or selling futures!
Is it simply a case of if I need to sell $ and contact currency is $ I sell futures. If I need to buy $ and contract currency is in $ I buy futures.
If I need to sell $ and contract currency is in another currency I sell futures.
If I need to buy $ and contract currency is in another currency I sell futures.Any help appreciated before I end up twisting myself in a knot!!
If we buy a foreign currency, we are concering about depreciation/appreication of local/foreign currency.
In futures, we have to take the opposite position.
Say 1.5$/UK Pound
In case of buying $, our risk would be reducing the rate. Say it will be 1.3$/UK Poind.
In this case, we have to sell the futures now and buy later at lower rate; if the contract currency is UKPound. That means you will be selling UKpound to buy $.Shall we say you will receive $ and as result, you have to sell $ buy UK pounds. If the contract currency is pound you have to buy futures now; which you will enable to sell it at higher price.
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Hi,
The answer with currency futures (as with all hedging strategies) is to undertake a futures trade that exactly mimics your intended underlying cash trade. One does not need to think about which way which currency is going to move.
So, let’s start with an example …
Your company is based in Singapore and is to receive a a US$ sum in two months time, and wishes to hedge the result.
If we go to SIMEX (ths Singapore exchange) we might find US$ futures listed … and in this case our strategy is to sell US$ futures, because our underlying intention is to sell the US$ receipt when recieved.
If we go to CME (a US exchange) we might find S$ futures listed … and in this case our strategy is to buy S$ futures, becuase our underlying intention is to sell the US$ receipt against (a purchase) of S$.
In both instances, our strategy involved mimicking what we wish to be doing in the future.In summary, one must first state what the exposure is. The exposure is always referred to in non-local currency terms (one is not ‘exposed’ to local/rptg currency). The next thing is to look at the contract currency. Now, depending on the exchange used, the contract currency may be your local currency or a non-local currency. If the contract currency is non-local currency then an underlying sale of non-local currency is hedged by a sale of futures. If the contract currency is local currency then the underlying sale of non-local currency is hedged by a purchase of local currency futures. Similary for a purchase.
Lookout for an upload of examples on this entitled: “To buy or sell futures, calls & puts ?”
Regards, Jerry.
I honestly do not understand any of this. i I have tried thinking about it has what i will enventualll do , i have tried to think of mirrowing my actual transaction. please help
Have you watched the free lectures on foreign exchange risk management?
Hi
Okay so you need to Look at the transaction to be hedged. So let’s say the company X Ltd (a UK firm) needs to make a payment denominated in a foreign currency (say €)
They’ll need to SELL £ in order to BUY €. (They don’t have €…. so they’ll need to use their £ in order to get €)Then you need to look at what is the currency the futures contract.
Let’s say it’s in £. Since the foreign exchange transaction involves SELLING the contract currency, you’ll have to SELL currency futures to hedge.Hope this helps and trust me I feel your pain with respect to hedging. (I’m a P4 student too)
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Please Sir can you send the link to the lectures on FOREX risk management?
From memory, this is an easy way to decide.
Buying contract currency – call option. Selling contract currency – put option
The contract currency is the one usually in brackets (often referred to as contract currency).
I got this from John’s lectures, but you should check to make sure I’m right (I might well not be).
I get what you feel, had the same problem. My advice is just watch the OT video, everyhting is explained in an easy and simple way.
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