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i have an issue with the number of contracts….
1. the contract currency is pounds, and since we are getting paid in usd, we will sell usd and buy pounds. therefore, for this futures hedge, we will buy pounds now and sell later. correct?
2. the future is quoted as pounds/usd. so taking the futures as 1.5275 (or 1.5353), the number of contracts is:
1 usd= 1.5275 gbp
4.1243m usd = ? gbpthus … 4.1243×1.5275/62500 = 100.79 contracts
question: why is the answer dividing by 1.5275??
thanks
This is a very old question (the examiner has changed twice since then) and I can see the confusion.
However, futures prices are always going to be similar to spot rates (even though they are obviously not the same because of the basis), and since the spot rates are quoted as $ to the Pound, and since the futures prices are the same order of magnitude then the futures prices must be quoted in the same way. The reference to Pound/$ futures refers to the fact that they are Pound futures, not to the exchange rate.
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