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Why is it that the exchange rate at which the contract is open, is considered the lock-in rate? Please explain how is that the case.
That’s the point of them.
They are priced by the futures market near the current exchange rate and their price stays close to that rate.
So if the exchange rate today were $US 1.3 = £1 then futures contracts would be priced near that. You could buy them for $1.3.
If you were going to receive US$ later, but the rate had by then moved to $1.4 you would be
out of pocket. However, the price of the futures would have moved to $1.4 and you could make a compensating profit on the futures (Sell at $1.4, bought at $1.3).Thank you. It’s a bit clearer to me now.
But refering in the example above, is $1.3 the lock in rate even if the hedge is not a perfect size one.
Is it correct when I say that we can easily use the lock-in rate $1.3 to calculate the cost or receipt in pound with the hedge, but only when it is a perfect hedge
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