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Sir, Could you please explain the over or under hedge in futures and options with forward rates?
It just confuses me how the amount is to be calculated and the hedge used.
Is it necessary to show this in exam or just state that that amount is to be left at risk?
Thanks
I explain dealing with an over or under hedge using forward rates in my free lectures on foreign exchange risk.
Ideally in the exam you would show the calculation. However it would only ever be worth 1 or 2 marks (if that), and if you are short of time then don’t do the calculation, but just comment that the risk could be removed by using forward rates on the over or under hedge.
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