Financial Management · Hedging techniques for foreign currency risk

Currency Futures Hedge Calculations for ACCA FM

Updated 11 October 2026 · Fact-checked

A currency future is a standardised, exchange-traded contract to buy or sell a fixed amount of currency at a set price on a set date. To hedge, pick the contract, work out the number of contracts, buy or sell, then add the futures gain or loss to the spot outcome at closure.

Understand Currency Futures

A currency future is a standard contract traded on an exchange. It fixes the price of a set amount of currency for a standard settlement date, usually March, June, September or December. You do not take delivery in practice. You close the position by doing the opposite trade before expiry, and the gain or loss on the futures offsets the change in the spot rate.

The difference from a forward contract is standardisation. A forward is a bespoke, over-the-counter deal for any amount and any date, and it fixes the rate exactly. A future has a fixed contract size, fixed dates and a fixed tick size. Because of that, you cannot hedge the exact amount or the exact date. You are left with a small residual risk. In return, futures are traded on an exchange, are margined daily and can be closed out early.

Two terms drive the calculations. The tick size is the smallest price movement, for example $0.0001. The tick value is the contract size multiplied by the tick size, which is the gain or loss per contract per tick. The exam usually gives you the contract size and tick size, so you work out the tick value yourself.

Basis is the difference between the spot rate and the futures price. In these notes, basis = spot rate − futures price. It shrinks to zero at expiry, which is called convergence. If the question gives the basis today, you normally assume it falls evenly over time. That lets you estimate the futures price on the day you close out.

The hedge direction is simple. If you will receive the currency that the contract is written on, you fear it will fall, so you sell futures now. If you will pay that currency, you fear it will rise, so you buy futures now. At closure you do the opposite trade.

Key rules to remember

Tick value: Tick value = contract size × tick size; For example, a £62,500 contract with a $0.0001 tick gives $6.25 per tick. The exam normally supplies the contract size and tick size.
Number of contracts: Number of contracts = exposure in contract currency ÷ contract size; Round to the nearest whole number. Say that the hedge is then slightly over or under the exposure.
Basis: Basis = spot rate − futures price; Use the same definition throughout. Basis converges to zero at the expiry date. Always check which sign convention the question uses.
Estimated basis at closure: Basis at closure = basis today × (months left at closure ÷ months left today); This assumes straight-line convergence. Count months to the expiry date of the contract, not to the transaction date.
Closing futures price: Closing futures price = spot rate at closure − basis at closure; Rearranged from the basis formula. Use it when the question gives the spot rate at closure and not the futures price.
Futures gain or loss: Gain or loss = ticks moved × tick value × number of contracts; Sold futures gain when the price falls. Bought futures gain when the price rises.
Net outcome: Net outcome = spot amount at closure ± futures gain or loss; Add a gain to a receipt or subtract it from a payment. Do the reverse for a loss.
Hedge direction: Receiving the contract currency: sell futures. Paying the contract currency: buy futures; Close out with the opposite trade at the transaction date.

How to solve Currency Futures questions

Use this order for any currency futures question. It keeps the working tidy and makes the marks easy to find.

1Identify the exposure: which currency, how much, receipt or payment, and the date. Decide whether you sell or buy futures using the hedge direction rule.
2Choose the contract. Pick the first expiry date that falls after the transaction date. Note the contract size, the tick size and the opening futures price.
3Work out the tick value, then divide the exposure by the contract size. Round to a whole number of contracts.
4Estimate the closing futures price. If you are given it, use it. If you are given the basis today, work out the basis at closure by straight-line convergence, then use closing futures price = spot − basis.
5Calculate the futures gain or loss. Find the price movement in ticks, then multiply by the tick value and the number of contracts. Check the direction: sold futures gain when the price falls.
6Convert the exposure at the spot rate on the transaction date, then add or subtract the futures result to get the net outcome. Divide by the exposure to find the effective rate if the question asks.
7Comment briefly if asked: the hedge is not exact because of whole contracts, basis risk and fixed dates. Compare with a forward contract or money market hedge when the question requires it.

Quickest way: Price-difference shortcut

When to use it: Use this in Section A or B objective questions when you only need the net result or the effective rate and the exposure is an exact multiple of the contract size.

Decide sell or buy futures from receipt or payment.
Take the opening futures price minus the closing futures price for a sell, or the reverse for a buy. This is the gain per unit of currency.
If the exposure is a whole number of contracts, multiply the gain per unit by the exposure. You do not need the tick value.
Add the gain to a receipt, or take it off a payment. A loss works the other way round.
Check the sign: a gain should make the outcome better for you, not worse.

Common mistakes in Currency Futures

Buying futures when you should sell, or the reverse.
Students focus on the home currency instead of the currency the contract is written on.
Fix: Ask what you receive or pay in the contract currency. Receive it: sell futures. Pay it: buy futures. Then check that the futures gain when the spot moves against you.
Choosing the wrong contract month.
Students pick the nearest expiry, even when it falls before the transaction date.
Fix: Choose the first expiry date after the transaction date. A contract that expires earlier cannot hedge the exposure on the date it arises.
Using the wrong tick value or miscounting ticks.
The tick size, such as $0.0001, is easy to misread, and students mix up price movement with tick value.
Fix: Write tick value = contract size × tick size first. Convert the price movement to ticks by dividing by the tick size, and check it with the shortcut of price gain × exposure.
Ignoring basis or applying it with the wrong sign.
Students use the spot rate as if it were the futures price, or flip the basis definition halfway through.
Fix: State your definition: basis = spot − futures. At closure, futures price = spot − basis. Estimate basis from the months left to expiry, not to the transaction date.
Rounding contracts up or down without comment, or forgetting to round at all.
Students think a fractional number of contracts is acceptable.
Fix: Round to a whole number of contracts. Say that the hedge is slightly over or under the exposure, and so is not perfect.
Claiming that futures lock in an exact rate like a forward.
Students carry the forward contract idea across.
Fix: Futures give an approximate rate. Whole contracts, fixed dates and basis risk leave some uncertainty, so call the result an estimate.

Worked examples

Example 1

A US company expects to receive £2,000,000 on 1 August. It is now 1 June. The spot rate is $1.2600/£ and September sterling futures (expiry 30 September) are $1.2540/£. Contract size is £62,500 and the tick size is $0.0001. On 1 August the spot rate is $1.2400/£. Assume basis falls evenly to zero at expiry. Calculate the net dollar receipt using futures.

Show the solution

Direction: the company receives sterling, so it sells September sterling futures.
Tick value = £62,500 × $0.0001 = $6.25.
Number of contracts = £2,000,000 ÷ £62,500 = 32 contracts.
Basis on 1 June = 1.2600 − 1.2540 = $0.0060. There are four months to expiry on 1 June and two months on 1 August.
Basis on 1 August = 0.0060 × 2/4 = $0.0030.
Closing futures price = 1.2400 − 0.0030 = $1.2370.
Futures gain: sold at 1.2540, bought back at 1.2370, so the price fell by 0.0170 = 170 ticks.
Gain = 32 × 170 × $6.25 = $34,000. Check: £2,000,000 × 0.0170 = $34,000.
Spot receipt = £2,000,000 × 1.2400 = $2,480,000.
Net receipt = $2,480,000 + $34,000 = $2,514,000. Effective rate = $1.2570/£.

Answer: The company sells 32 September sterling futures and expects a net receipt of $2,514,000 (about $1.2570/£).

Example 2

A US company must pay €1,100,000 on 15 August. It buys September euro futures at $1.0900/€. Contract size is €125,000 and the tick size is $0.0001. On 15 August the spot rate is $1.1180/€ and the September futures price is $1.1150/€. Calculate the net dollar cost and comment on the hedge.

Show the solution

Direction: the company pays euros, so it buys euro futures now and sells them back on 15 August.
Tick value = €125,000 × $0.0001 = $12.50.
Number of contracts = €1,100,000 ÷ €125,000 = 8.8, so use 9 contracts.
Futures price rose from 1.0900 to 1.1150, a movement of 0.0250 = 250 ticks. The company bought, so this is a gain.
Gain = 9 × 250 × $12.50 = $28,125.
Spot cost on 15 August = €1,100,000 × 1.1180 = $1,229,800.
Net cost = $1,229,800 − $28,125 = $1,201,675.
Comment: 9 contracts cover €1,125,000, slightly more than the exposure, so the gain is a little over-hedged. Basis risk and the fixed contract size mean the outcome is only approximately certain.

Answer: The net cost is $1,201,675 using 9 purchased September euro futures. The hedge is approximate because of whole contracts and basis risk.

Exam tips

Write the sell or buy decision and the contract month at the top of the answer. Markers look for both, and so do the objective test options.
Always show tick value, number of contracts and ticks moved on separate lines. In a Section C answer, method marks depend on this working.
Check your result with price difference × exposure. It takes ten seconds and catches tick errors.
State your basis definition and your assumption of straight-line convergence. Then use the same sign throughout.
If asked to compare with a forward contract, give two or three points: futures are standardised, margined and exchange-traded, while forwards are tailored, fix the rate exactly and carry counterparty risk.

Practice questions from Hedging techniques for foreign currency risk

Currency Futures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Currency Futures: frequently asked questions

What is the difference between a forward contract and a futures contract?

A forward contract is a tailored over-the-counter agreement for any amount and date, and it fixes the rate exactly. A futures contract is standardised, traded on an exchange and settled through a clearing house. Futures have fixed contract sizes and dates, so the hedge is approximate.

How do I calculate the number of futures contracts?

Divide the exposure in the contract currency by the contract size. Round to a whole number. For example, £2,000,000 ÷ £62,500 is 32 contracts. If the answer is not exact, say that the hedge is slightly over or under the exposure.

What is basis in currency futures?

Basis is the difference between the spot rate and the futures price. In these notes it is spot minus futures. It reduces to zero at expiry. Exam questions usually give today's basis and ask you to assume it falls evenly, so you can estimate the closing futures price.

Should I buy or sell futures to hedge?

Sell futures if you will receive the currency the contract is written on. Buy futures if you will pay that currency. At the transaction date you close the position with the opposite trade.