Hi everyone,
I have a doubt regarding the futures hedging treatment in the Passmore Co question in AFM.
The model answer states that we should “sell September futures.” However, I am trying to understand the logic behind the direction of the hedge.
Since the transaction involves receiving a fixed amount in rupees, I am confused about whether we should be buying or selling futures initially and then closing the position later.
For example, if we consider an exchange rate of $1 = ₹70, which subsequently changes to $1 = ₹75, how should we interpret the movement and determine the correct futures position? Should we sell September futures now and buy them back later, or should we buy futures now and sell them later?
I would appreciate it if someone could explain the logic behind the model answer and clarify how the underlying exposure determines the direction of the futures hedge.
Thank you!
