Since you have asked it here, I’ll answer it here, but the ‘Ask the Tutor Forums is a better place as your query and my answer are more likely to be seen by other students.
There is not really any such thing as a USD futures contract. Futures contracts are always denominated in $ with respect to another currency. So you can have £ futures and € futures but both are with respect to US$ and their prices are in US$
Understanding that point greatly simplifies matters as to whether you then need to buy or sell futures.
So, if the current $/£ rate is 1.2 and you need 200,000$, you will be worried that the rate changes to something like $/£ = 1.1 because that will cost more £.
If the exchange rate falls so, generally, will the futures price. The idea is that you buy/sell £ futures to make a profit to compensate on the exchange rate loss. If futures prices are going to fall then you can make a profit by selling now (at around $1.2) and buying later (at around $1.1). Another way of thinking about it is that you do now with £ futures what you have to do later with the currency ie sell £.”
I do not agree with the statement: “currency futures are not the same as (USD) futures contracts”.
First, thank you very much for all the effort put in preparing the materials and sharing them free of charge, it is indeed helpful.
If feasible, could you please advise on the following question: A UK company is to pay US supplier 200.000 USD in 6 months time, but is unsure about the exchange rate movement and would like to hedge the transaction. Which option(s) could it choose? 1. buy USD futures contract 2. if the company wants to use currency futures, it should sell USD futures Apparently, both options are correct. A fellow student mentioned that currency futures are not the same as (USD) futures contracts. Is that true?? I would appreciate your thoughts about how to approach this and similar questions. Is the point that with option 1 we secure a specific FX, and with option 2 we ensure that the potential loss on FX movement is off-set by USD futures price difference (or FX gain is off-set by loss from USD futures price difference) Many thanks!!
Ken Garrett says
Since you have asked it here, I’ll answer it here, but the ‘Ask the Tutor Forums is a better place as your query and my answer are more likely to be seen by other students.
There is not really any such thing as a USD futures contract. Futures contracts are always denominated in $ with respect to another currency. So you can have £ futures and € futures but both are with respect to US$ and their prices are in US$
Understanding that point greatly simplifies matters as to whether you then need to buy or sell futures.
So, if the current $/£ rate is 1.2 and you need 200,000$, you will be worried that the rate changes to something like $/£ = 1.1 because that will cost more £.
If the exchange rate falls so, generally, will the futures price. The idea is that you buy/sell £ futures to make a profit to compensate on the exchange rate loss. If futures prices are going to fall then you can make a profit by selling now (at around $1.2) and buying later (at around $1.1). Another way of thinking about it is that you do now with £ futures what you have to do later with the currency ie sell £.”
I do not agree with the statement: “currency futures are not the same as (USD) futures contracts”.
tijanabt says
First, thank you very much for all the effort put in preparing the materials and sharing them free of charge, it is indeed helpful.
If feasible, could you please advise on the following question: A UK company is to pay US supplier 200.000 USD in 6 months time, but is unsure about the exchange rate movement and would like to hedge the transaction. Which option(s) could it choose?
1. buy USD futures contract
2. if the company wants to use currency futures, it should sell USD futures
Apparently, both options are correct. A fellow student mentioned that currency futures are not the same as (USD) futures contracts. Is that true??
I would appreciate your thoughts about how to approach this and similar questions. Is the point that with option 1 we secure a specific FX, and with option 2 we ensure that the potential loss on FX movement is off-set by USD futures price difference (or FX gain is off-set by loss from USD futures price difference)
Many thanks!!
opentuition_team says
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