Foreign exchange risk management (1) Part 6 – ACCA (AFM) lectures
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Hi John,
Thanks for the well explained videos. I am learning a lot!
Just encountering the same issue with the first post here from Ashvin. Tried to mine in the forum Ask Tutor forum but due to passage of time, I am unable to land on your answer. Any easier way I could see your feedback?
Many thanks.
Although what Ashvin wrote is logical the problem is that we assume that the basis risk moves linearly whereas there is no reason it should be perfectly linear (and it can’t move linearly with both spot rates). Because of this the calculation of the number of contracts is only an approximate calculation (although usually, because of the need for it to be whole numbers of contracts, it comes to the same answer). The examiner accepts either calculation because the marks are for proving you understand basically how using futures hedge the risk and not for perfect accuracy (which would be impossible anyway because of the assumptions).
It is clear now. Thanks.
Hi John,
With all due respect and I have a lot of respect for you and your work, I think the way in which you did example 9 is wrong.
It doesn’t lead to the wrong answer but I think the principle behind one little part of your methodology is wrong and I am writing because I want to confirm the logic of it.
In the example, T Plc is based in the UK. They will receive $1,200,000 in couple of weeks.
If they converted at current spot, they would get $1,200,000/ 1.5110 = £794176. This is what represents their risk and not the $1,200,000. They are at risk than when they convert their $1,200,000, they won’t get the £794,176 that they would get now.
And thus the contract size has to be for £794,176/ 62500 = 12.7068 and not $1,200,000/1.5045/62500 = 12.7617.
To prove this, we can run a simulation. If we assume that the futures contract could be bought in partial sizes and that the futures price moved exactly as much as the spot prices did (1.5190-1.5110 = 0.008), using 12.7068 contracts would give a perfect hedge whilst using 12.7617 would not.
I hope you have the time to read this comment and to let me know what you think.
Thank you for your work, I am truly grateful for you and your organization.
Have reposted in the AFM ask the tutor forum.
I have replied to your post in the forum 🙂
Hi sir, thank you for your lecture video
I would like to ask for example 9, why is it to buy futures, isn’t we need to sell $, so we have to sell futures?
The contract size is quoted in Pounds in this example. They are selling $’s which means they will be buying Pounds and so they will buy Pound futures.
Thank You Mr Moffat for great lecture!
I wanted to ask, why we do not calculate under/over hedging here?
I mean if we use 13 contracts instead of 12.76 , why we do not try to exclude part of it?
At the end we got 794-797 k GBP in the beginning and we hedged it with 812.5 k GBP
The under or over hedge either will have to be converted at spot, or if forward rates are available we can use forward rates for it in order to fix the conversion.
You should always mention this in answers. If you have the time (and there are forward rates given) then it will be good to show the calculation also (although that part will never carry more than one or two marks, which is why I write ‘if you have the time’ 🙂 )
Dear Sir,
In the notes, in Chapter 18, Answer to Example 9, instead of On 10 September, shouldn’t be the transaction date 12 November, as it’s shown in the lecture.
You are correct. Thanks for pointing that out.
Hi John,
Hope you’re doing well.
Thank you so much for your wonderful lectures.
Can you please confirm, if we have the flexibility with the futures does that mean we can hold the same till December? As in the given question we expect to receive the money on 12 Nov and we opt for futures December so we have the time to close the deal till the last day of December?
Please confirm!
Thank you in advance.
Yes, you can close the deal at any time up until 31 December.
As we over hedged the amount will we not take account of it. If we would be under hedging, it won’t cover the whole transaction, so the shortfall must be added in the receipt by converting it at Transaction Spot Rate.
Just confused because as in the case of Options we calculate the Under/Over hedge, so do we do the same in the case of Futures?
Thank you very much Sir, its an amazing lecture. Very well understood.
Amazing Lecture. Thank you Sir Moffat
Thank you for your comment 🙂
Hello John,
Great lectures! I have one question regarding the closed future contract of 6093.75. Why is this in $$’s if the future contract purchased was in lots of 62500 ££’s? The video time is 18:24.
The exchange rates (and therefore the gain) is quoted in dollars per pound.
Sir is there a place where i can find the questions that you take up in your video lectures? If yes, then where exactly? Could you attach a link possibly to the questions?
Go to ‘ACCA’ in the top bar. In the new bar that appears go to ‘AFM’.
There you will find links to all our AFM resources including our free lecture notes.
Hello Sir!
My query is that: for instance if we tended to receive the amount at 12th Sept 2004 then do we choose September futures (as the futures usually expire at the end of the month)?
Oh I get it! You use Sept futures to hedge the 12th Sept amount, as its expires at the end of month. So there is still time to hedge it before expiry.
Thank you Sir for your well explained and wonderful lectures.
Hi sir, sorry to be posting a past year question here, but the Ask tutor forum page can’t seem to be found.
From the March/June 2016 paper Question 1 LIRIO, for the currency futures calculation-
I don’t get how the spot rate for the date of conversion(1 June) is found, hence I cannot find the futures rate on that date as well using the method you taught us.
The answer uses – 0·8638 + (2/3 x (0·8656 – 0·8638)) = 0·8650 [This can also be done using the spot rates or forward rates] which i do not understand.
You can find the link to the Ask the Tutor Forum on the main AFM page!
The answer has apportioned between the March rate (in 1 month) and the June rate (in 4 months) to get a 3 month rate. However as the examiner states in his example you get exactly the same answer by doing it the way I explain in my lectures, which is strictly the more correct way.