ACCA AFM · Guided practice (Show me how)
Chapter 18: Foreign Exchange Risk Management (1)
Currency futures: contracts, basis and the outcome of a hedge
Quotes are dollars per pound. The lower quote applies when buying dollars; the upper when selling them. Sterling futures are contracts of GBP 62,500 and expire at the end of March, June, September or December. Assume linear basis. Round the initial basis, remaining basis and closing mid-market spot to four decimals before using them.
(a) On 1 July spot is 1.5050 - 1.5150 and September futures 1.4900. On 31 August spot is 1.5250 - 1.5370. There are 3 months from 1 July to expiry and 1 left at 31 August.
(b) It is 20 June. S plc must pay $500,000 on 12 September. Spot is 1.4821 - 1.4896. Futures are June 1.4800, September 1.4840, December 1.4860. Spot on 12 September is 1.4791 - 1.4812. There are 102 days from today to September expiry and 18 left at payment. Use the nearest whole contract. Round the dollar futures gain to whole dollars before converting it, and sterling cash flows to whole pounds before netting.
(c) Recalculate the unrounded dollar profit using a tick of 0.0001.
(a) The basis falls linearly
Calculate the estimated September futures price on 31 August.
(b) Set up the hedge
Identify the futures hedge and calculate the contract count for S plc's payment on 12 September.
(b) The futures price on 12 September
Calculate the estimated September futures price on 12 September.
(b) The outcome
Calculate the net sterling payment on 12 September and explain why the hedge is not exact.
(c) The same profit in ticks
Calculate the dollar futures profit on 12 September in ticks.
Opening this exercise…