CT2 Chapter 5 Use of Derivatives- Currency Futures

Discussion in 'CT2' started by Aarushi Gupta, Sep 14, 2018.

  1. Aarushi Gupta

    Aarushi Gupta Member

    'This is how Currency Futures can be used for Hedging:
    If for example a UK company sells products to US customer who pays in US $, the company is exposed to the risk of the dollar falling in value.
    If the Co. sells USD currency futures at the current rate this acts as a hedge because..
    ..if the USD falls, the customers's payment will be worth less when converting back to sterling, but..
    ..the profit from the derivative should offset this loss.
    If the dollar rises, any potential profit will also be offset in the derivative market.'

    The above is an answer of a question. Kindly explain in detail with example taking values (for price of derivative, current exchange rate of $1=0.76 pounds, price the UK Co. had to receive etc.) how a currency future works and how the future's price and underlying asset value offset the loss/profit.'
     

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