Futures contracts - part 2

In this lesson

1. 0:00 How futures contracts work
2. 0:14 Seven-step calculation methodology
3. 2:59 Worked example: UK company hedging dollars
4. 10:29 Converting to exchange rate
5. 11:02 Ticks, margins, and trader terminology

About this lesson

This video breaks down the seven-step methodology you need to calculate gains and losses on futures contracts, with a worked example showing how a UK company hedges a foreign currency transaction. You'll also become familiar with trader terminology like ticks, initial margin, variation margin, and marking to market—essential knowledge for narrative questions in Advanced Financial Management. The core technique centres on thinking consistently in the currency of the futures contract, deciding whether to buy or sell based on your transaction, selecting the correct standardised contract date, and calculating the number of contracts needed. The seven steps take you from identifying the contract currency through to your final net position, with careful attention to currency conversions at the right exchange rates. By working through the detailed example, you'll see how to handle the calculations accurately and understand why labelling every figure with its currency prevents costly mistakes. This content is directly relevant to AFM and sits within the foreign exchange hedging section of the syllabus. The methodology and terminology covered here appear regularly in exam questions, particularly in narrative-style tasks where you need to explain and calculate hedging outcomes. With practice using this structured approach, these calculations become straightforward and repeatable.

Duration: 15m