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A person who has to pay in 3 months time will buy the futures now or sell the futures now to hedge the risk? I mess up with buying and selling futures despite watching lectures and reading the textbook.
also, futures can be used to hedge against the interest rate risk and I read in the book that the borrower sells the future now and buys at a later date . is it the same for a person making a payment?
As I explain in my lectures, you cannot be asked for calculations involving futures (either for foreign exchange risk or for interest rate risk). All that can be expected is that you can describe basically how they are used.
It is therefore not really relevant in the exam to know whether we are buying or selling futures. For your information, if the transaction itself involves buying (say) $’s, then we buy $ futures and sell later. If the transaction involves selling (say) $’s, then we sell $ futures and buy later.
With interest rate futures, if we are borrowing money then we sell futures (and buy later). If we are depositing money then we buy futures (and sell later).However, again, you are not required to know the detail above for Paper FM (it is in Paper AFM that you will be required to do full calculations and then do need the full detail, and obviously I explain it all in my Paper AFM free lectures).
yes, sir, I know but I wanted to understand the concept since I have seen an mcq in one of the examiner reports asking about buying and selling futures.
sir, I still have a confusion related to futures. the bpp text says:
a) the buyer of a future enters into an obligation to buy on a specified date
b) the seller of a future enters into an obligation to sell on a specified future date.but you have mentioned that buyer buys future now and sells later .however the textbook say buyers buy future at a later date.
Sir for eg I have to pay USD 30,000 in 6 months time and my home currency is GBP. I want to use futures to hedge the risk.
Will I buy futures now and sell at a later date or will I sell futures now and buy at a later date.
for borrowers and lenders, I have understood it after watching your lectures.
Thankyou in advance.
Sorry, but either what your textbook says is completely wrong, or more likely you have misunderstood.
What you have typed is a description as to how forward rates are used, and they are completely different from using futures.
For your example, if $ futures are available then you will buy $ futures now and sell them on the date of the transaction. If they are GBP futures, then you will sell GBP futures now and buy back on the date of the transaction. Exactly as I said in my previous reply.
If (and only if) you have watched all of my free lectures, then you would be better spending your time practicing all of the questions in your Revision Kit – they are all either past exam questions or exam-standard questions.
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