Question 3 - Part a
You'll learn how to work through a multi-part hedging calculation involving forwards, futures, and options on a currency transaction.
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In this lesson
- 0:00 Hedging currency transactions overview
- 2:07 Spot rate and forward rate calculations
- 5:00 Futures hedging setup and contract sizing
- 7:09 Basis working and lock-in rate calculation
- 11:04 Over-hedging adjustment with forwards
- 17:07 Call option premium and exercise calculation
- 22:25 Under-hedging adjustment with forwards
- 26:45 Comparing hedging outcomes and recommendations
About this lesson
This lesson walks you through the complete methodology: identifying net cash flows in foreign currency, calculating spot and forward rates, determining the number of futures contracts needed, applying basis calculations to lock in rates, and working through options pricing with premium costs. You'll see how to handle over-hedging and under-hedging scenarios where additional forward contracts are needed to balance the position, and how to compare all three hedging methods to make a final recommendation. This is essential preparation for Advanced Financial Management or Strategic Business Leader case study questions that test your ability to evaluate hedging strategies under realistic constraints.
Duration: 33m
Transcript
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