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John Moffat.
John Moffat.-
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Abriks
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Good day, please in this Nedwen question d part of the question that talks about how sterling currency futures can be used to hedge the three month dollar receipt, the answer explained a key point that the company would have to buy futures now and sell them at a later date (June), which I don’t understand, I thought the company would have to sell future contract now to buy at a later date, since the company would have to borrow in foreign currency in other to hedge the exchange rate risk, because for a borrower, the borrower sells the futures contract and buys it later and an investor/ depositor buys the future contract and sells them later, according to my understanding….please I’d be glad if this area is clarified to me..thank you.
John Moffat
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I do not have the Kaplan Kit – only the BPP Revision Kit. However I do have all past exam questions and so if this question is marked as being from a past exam then please tell me the date of the exam and I will then be able to find it.
However, from what you have typed, the transaction involves receiving dollars which will therefore mean selling dollars and buying pounds.
Since the futures contracts are in pounds, then to hedge the transaction which is buying pounds they will also buy pound futures.
I do explain the logic and the reason for this in my free lectures on foreign exchange risk management. We always buy or sell futures the same way as the transaction involves buying or selling the contract currency.
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