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December 2018 Question 2 on Hedging Currency

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › December 2018 Question 2 on Hedging Currency

  • This topic has 3 replies, 2 voices, and was last updated 6 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • February 20, 2019 at 9:44 pm #505942
    mat82pl
    Member
    • Topics: 3
    • Replies: 3
    • ☆

    Dear Sir,

    I got the understanding that if there is a borrowing, then you go short and you sell futures.
    When you get receipt, it is for going long and you buy futures.

    Why in the answer it says Sell Futures and for option it says buy put options?

    Is it because there is a switch in the way base and counter currency is shown? I mean US is base country and the forex is shown as 1CHF: $? Cause for any calculations like bank sells low or buys high you have to switch either on the paper or in your mind to avoid mistake.

    Please help me in easy terms how to never make a mistake in identifying when to sell and when to buy futures and put/call for options.

    Thank you in advance.
    Kind regards.

    PS. Thank you for your work for students all around the world.

    February 21, 2019 at 8:11 am #505989
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    In future you must ask in the Ask the Tutor Forum if you want me to answer – this forum is for students to help each other.

    Using foreign currency futures has nothing to do with borrowing.

    The company works in $’s, and they are receiving CHF.

    Therefore the transaction itself involves selling CHF and buying $’s.

    When using futures, the trade in the futures in the same way as the underlying transaction, and since the futures contract size is in CHF they will sell CHF futures.

    As far as options are concerned, we always buy options. The question is as to whether they buy call options or put options. Again, the contracts are quoted in CHF, and since they want the right to sell CHF they will buy put options.

    Do watch my free lectures on foreign exchange risk management, because I do explain the rules (with examples) as to how to use foreign exchange futures and options.

    March 7, 2019 at 9:21 pm #508441
    mat82pl
    Member
    • Topics: 3
    • Replies: 3
    • ☆

    Sir and what if I have receipt in dollar and I am in euro? Like M/J 2017 q3. No info on contract currency there

    March 8, 2019 at 8:28 am #508502
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    There are no contracts in this question because they are not traded options – they are OTC options.

    However, the question specifically states that they are $ options and therefore the options are the right to buy or sell $’s at a fixed rate.

    Given that they are receiving $’s, they will want the right to sell $’s at a fixed rate and therefore they will buy $ put options.

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