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In the P4 Mar/Jun 2016 past year paper on the ACCA website, question 1 answer sheet wrote “(Full credit will be given where the calculations are used to show the correction of the over-hedge using forwards)” in the workings for using futures contracts to hedge a receipt of foreign currency. May I know what the bracketed words mean?
Because of the contract sizes, using futures will not exactly hedge the amount – it will be a bit too much or a bit too little. Therefore there is going to be an amount left at risk – the over-hedge or the under-hedge. It is possible to remove this risk by using forward rates on the amount of the over or under hedge.
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