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Number of contracts – MR96,461,668/MR500,000 = 192.9, say 193
Amount over-hedged = (500,000 x 193 x $0.2374) – $22,900,000 = $9,100Here they have used 0.2374 to determine the over hedged amount. Are not we supposed to use the original futures price 0.2378 , as it was used to decide the number of contracts required?
As far as the examiners answer is concerned (which I am assuming is what you are looking at), the number of contracts required has been correctly calculated by using the ‘lock-in’ rate of 0.2374 (and not 0.2378). This is the effective rate at which the contracted amount will be converted and therefore is the relevant rate for determined the amount over-headed.
Have you watched my free lectures on exchange rate futures?
yes I have watched the lectures.
But in some of the questions i have come across, it was the opening future price that was used to determine the number of contracts required.
It really depends on the information available, but it should be the lock-in rate that is used (as it was in the answer to this particular question).
(Having said that it rarely makes much difference, and although using the wrong rate would lose a mark, most of the marks are for showing how futures ‘work’ regardless as to whether or not the correct rate has been used 🙂 )
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