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Futures Hedge

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Futures Hedge

  • This topic has 7 replies, 3 voices, and was last updated 4 years ago by John Moffat.
Viewing 8 posts - 1 through 8 (of 8 total)
  • Author
    Posts
  • September 2, 2020 at 10:17 pm #583179
    raheel95
    Member
    • Topics: 15
    • Replies: 11
    • ☆

    Hello,

    If the question does not state whether or not a company wanys to under hedge and then hedge the remaining amount using a forward contract, would we get full marks for simply calculating the net receipt/payment based on an over hedge. Or should we always assume that they are going to underhedge and then hedge the remaining through a forward contract.

    Similarly for options – does the same rule apply?

    Thanks,

    Raheel

    September 3, 2020 at 10:26 am #583230
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    Go to the nearest whole number of contracts and that automatically determine whether there is an over-hedge or an under-hedge.

    September 3, 2020 at 10:20 pm #583309
    Magdalena
    Member
    • Topics: 0
    • Replies: 29
    • ☆

    Dear sir,

    what in case when we are able only to calculate the effective rate on futures hedge? If I’m not wrong you explained in the lectures that in this case we can only calculate the final approximation of the outcome, without separating the unhedged amount. But in the exam from March 20, Q2b – the answer seems to calculate the effective rate and use this rate to later calculate the numbers of contracts and the unhedged amount… Is this solution ok?

    September 4, 2020 at 9:58 am #583368
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    I think you are confusing futures with options.

    We don’t calculate an effective rate for futures. Unless we are given the spot rate or the futures price on the date of the transaction, we calculate the lock-in rate and apply this to the contracts. Any difference because of having to have whole numbers of contracts is the over or under hedge and we will use forward rates on this.

    September 4, 2020 at 2:40 pm #583446
    Magdalena
    Member
    • Topics: 0
    • Replies: 29
    • ☆

    Thank you sir!
    I was referring to lock-in rate (I followed the term used by BPP in their workbook).
    I watched again the lecture (FX risk mgmt 1 p8) and in fact, it was my misunderstanding. So in fact we have to use the lock-in rate to calculate the number of contracts (not the futures price) and any difference is then over/underhedged.

    September 4, 2020 at 4:40 pm #583477
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    OK (although they shouldn’t really call it an effective rate 🙂 ).

    Correct 🙂

    September 4, 2020 at 9:59 pm #583504
    Magdalena
    Member
    • Topics: 0
    • Replies: 29
    • ☆

    noted, thank you sir!

    September 5, 2020 at 9:37 am #583540
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54679
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 8 posts - 1 through 8 (of 8 total)
  • The topic ‘Futures Hedge’ is closed to new replies.

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