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Good day sir
Question Casasophia part a, using future contracts to hedge against the weakness of USD20 mil. received in 4 months. The hedge is as follows.
We need to buy 117 contracts (rounding from 116.89 which indicates there is an overhedged amount).
My question is when over hedge features, we use transection converted at the predicted features price to find the outcome of the features hedge (instead of of using number contracts times contract size, as examiner has used past papers).This one looks different. why so
Thanks in advance
Using futures contracts effectively fixes the exchange rate on the contract amount. As far as any over or under hedge, the only way of removing the risk on this amount is to use forward rates on it (if they are available) – we do not use the predicted futures rate on the over or under hedge.