Futures contracts

In this lesson

1. 0:00 Futures contracts introduction and mechanics
2. 3:22 Setting up a futures position step by step
3. 5:00 Calculating transaction outcomes with futures
4. 6:04 Worked example: Bracket Co currency hedge
5. 11:00 Basis calculation for closing futures prices
6. 13:17 Worked example: Halifax receivable hedge
7. 19:54 Locking rate method for time efficiency

About this lesson

You'll discover what futures contracts are—legally binding agreements to buy or sell currency at a predetermined price on a specified date—and why companies use them to lock in exchange rates rather than to physically deliver currency. The lesson covers the key mechanics: how futures expire quarterly, require an initial margin deposit, are marked to market daily, and come in standardised contract sizes that must be used in whole numbers. The core calculation method involves three setup steps (determining whether to buy or sell futures, calculating the number of contracts needed, and selecting the appropriate expiry date), followed by working out the transaction value at the spot rate and the futures position outcome. You'll learn how to handle situations where the closing futures price isn't given by using a basis calculation—finding the difference between spot and futures prices, then apportioning it across the time remaining until expiry. The lesson also introduces the locking rate method as a time-saving alternative for the exam. Throughout, you'll work through detailed examples using real scenarios: a German company hedging a dollar payment and a UK company hedging dollar income. These demonstrate how to apply the consistent methodology, interpret gains and losses correctly, and sense-check your results. This content is essential for Performance Management, Advanced Performance Management, and Financial Management papers.

Duration: 22m