Hedging Specifics Flashcards
How do you calculate the number of contracts for interest rate products?
Loan Size/Contract Size x Duration/3months
How do you calculate the number of contracts for Index products?
Portfolio value/(Futures price or strike price x £10)
How do you calculate the number of contracts for currency products?
Amount of currency/Contract size - MAKE SURE THEY ARE IN THE SAME CURRENCY
How do you determine whether to buy or sell with interest rate products?
Borrowing: SELL FUTURES (Buy Puts)
Lending/Depositing: BUY FUTURES (buy calls)
How do you determine to sell or buy index products?
Selling a portfolio: OR Protecting a portfolio
SELL FUTURES: Buy PUT
Buying a portfolio: BUY FUTURES (Call)
How do you determine to sell or buy index products?
Selling a portfolio: OR Protecting a portfolio
SELL FUTURES: Buy PUT
Buying a portfolio: BUY FUTURES (Call)
How do you determine whether to buy or sell currency products?
Protecting = PUT
Buying $/Euro and selling £ = Sell Futures (buy puts)
Selling $/Euro and buying £ = BUY Futures (Buy calls)
How do you calculate a profit or loss on an interest future rate product?
Will be a percentage therefore multiply the outcome by:
3/12 x 500k x no of contracts
How do you calculate a profit or loss on an interest future index products?
Will be in points, therefore multiply the outcome by £10 x no of contracts.
E.g. Index goes from 5000 to 4100.
900 x £10 = 9,000
x 112 contracts = £1,080,000 gain
How do you calculate a profit or loss on an interest future currency products?
Profit/loss will be in denominated currency per £ therefore multiply by
Contract size x no of contracts
Then translate back to £!
E.g. Futures currently trading at 1.6496
Payment of 1,550,000 dollars
£62,500 contract size
= 1,550,000/1.6496/62,500 = 15 contracts
Future spot = 1.6400
(1.6496 - 1.6400) x 15 x 62,500 = gain
Deduct a gain from a payment/Add a gain to a receipt and then divide by the future spot rate
How do you calculate a premium on future interest rate options?
Will be a %, therefore multiply the outcome by
3/12 x 500k x no of contracts
How do you calculate a premium on future index options?
Will be in points, therefore multiply the outcome by:
£10 x no of contracts
e.g. the ut premium is 70 points in December =
70 x £10 x number of contracts
How do you calculate a premium on currency futures contracts (options only)?
Premium will be in denominated currency per £ therefore multiply by:
Contract size x no of contracts
Then convert back to £!!
How do you approach any traded options questions?
Approach to cope with any traded options question:
1 Decide whether to buy a call or a put
2 Decide what expiry date to pick (the next date AFTER you expect to act)
3 Calculate the number of contracts
4 Decide what strike price to choose (therefore what is the premium)
5 Show the calculation (three elements)
£ £
Transaction at the market rate (easy) X/(X)
Futures position
Price now X
Price later X
Profit/Loss X/nil X /nil
× amount per contract × no of contracts
Premium (X)
Overall position X
Currency Hedging - Futures and Traded Options - what expiry date do you pick?
The first date AFTER the settlement date (i.e. if the settlement date is mid-May and there are March or June contracts on offer – you need the JUNE contracts).
Index hedging - which date do you pick?
The first date AFTER they need to sell (i.e. if they want to protect against prices falling until 10 July, then buy September contracts).
Interest rate hedging - Futures and traded options - What expiry date to pick?
Pick the first date AFTER the borrowing/lending starts – e.g. If you need to borrow on 31 March, use March contracts. If you need to borrow on 3 August, use September contracts.
