Question 3 - Part b

In this lesson

1. 0:00 Introduction to currency hedging strategy
2. 1:18 Forward rate calculation and bank margin principles
3. 3:33 Futures contract setup and currency conversion
4. 6:04 Buying versus selling futures and call options
5. 8:07 Calculating number of contracts required
6. 9:38 Basis working and lock-in rate methodology
7. 14:01 Applying futures outcome to transaction
8. 14:40 Option premium calculation and conversion
9. 18:16 Unhedged amounts and forward conversion
10. 20:18 Comparing outcomes across three strategies
11. 22:37 Margin requirements and cash flow implications

About this lesson

The video walks you through a complete hedging analysis for a receipt of €18.6 million due in six months. You'll see how to set up each hedging instrument methodically: calculating forward rates carefully (watching for inverted exchange rates), determining the correct futures contract and number of contracts needed, and working through basis calculations to establish a locking rate. For the option, you'll learn how to calculate the premium cost and compare outcomes across all three strategies. The session emphasises practical problem-solving techniques used in real exams: keeping your working clear and referenced, recognising when to use spot versus forward rates, and understanding why the bank always wins on exchange rates. You'll also explore the trade-offs between strategies—futures lock in the best rate but require margin funding, forwards are simpler but create counterparty risk, and options are expensive but preserve upside potential. The video concludes with guidance on margin requirements and how to structure your written analysis when time is tight.

Duration: 27m