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A company is going to receive €35,000 from its foreign customer at the end of March. Now, it sells a €35,000 March futures contract to hedge against forex risk.
What does the company do after this? Does it wait until the futures contract reach maturity and actually sell the € at the futures rate? Or does it sell the € separately from the futures contract and close out the futures position by buying a March futures?
You must watch the free lectures on foreign exchange risk management.
All of this is explained in the lectures together with examples – you cannot possibly expect me to type out all of the lectures here.
The whole point of using futures is to make a compensating gain or loss for the loss or gain made on the transaction itself.
The 35,000 is converted at whatever the spot happens to be on the date it is received.
The futures deal is closed on the same date and the company received any gain or pays in any loss on the futures.(As you will see in the lectures – often in the exam we are not told what spot is on the date of the transaction, in which case we need to calculate the lock-in rate, which is the net effect of the two separate things above)
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