Advanced Financial Management · The use of financial derivatives to hedge against forex risk

Currency Futures Hedging: Calculation and Closing Out

Updated 11 October 2026 · Fact-checked

A currency future is a standardised, exchange-traded contract to buy or sell a fixed amount of foreign currency at a set price on a set date. To hedge, divide the exposure by the contract size, buy futures if you will pay currency and sell if you will receive it, then close out and add the gain or loss to the spot result.

Understand Currency Futures Hedging

A currency future is a standard contract traded on an exchange. It fixes the price for a set amount of one currency, in terms of another, at a set expiry date. The contract size is fixed by the exchange, so you cannot ask for the exact amount you need. The exam gives you the contract size and the price quote.

You hedge by taking a futures position that moves opposite to your underlying exposure. If you will pay foreign currency later, you are worried the currency will get dearer, so you buy futures. If you will receive foreign currency, you are worried it will get cheaper, so you sell futures. Any gain or loss on the futures offsets the change in the spot rate.

Most hedgers do not deliver the currency through the future. They close out: on the exposure date they do the opposite deal (sell what they bought, or buy back what they sold) and take the difference as cash. They then deal in the spot market as normal. The futures profit or loss is added to or deducted from the spot cash flow.

The tick size is the smallest price move. For a $ per £ contract of £62,500 with a tick of $0.0001, one tick is worth $6.25 per contract. Gains and losses are the number of ticks moved × tick value × number of contracts.

Basis is the spot rate minus the futures price. It is not zero before expiry, but it falls to zero at expiry. In exam questions you usually assume basis reduces evenly over time. So if you close out before expiry, the closing futures price is not equal to spot. This leftover is basis risk, and it is why a futures hedge is rarely perfect.

Compared with a forward contract, a future is standardised, exchange-traded, needs margin and is marked to market daily. A forward is over the counter, can be for any amount and date, and is normally settled by delivery. Futures are flexible because you can close out early, but the contract size means part of the exposure may stay unhedged.

Key rules to remember

Number of contracts: Contracts = Foreign currency exposure ÷ Contract size; Round to a whole number of contracts. The unhedged remainder is dealt with at the spot rate on the exposure date.
Direction of the hedge: Paying foreign currency → buy futures; receiving foreign currency → sell futures; Check which currency the contract is written on. If the exposure is in the currency the contract prices, you may need the reverse position.
Tick value: Tick value = Contract size × Tick size; Example: £62,500 × $0.0001 = $6.25 per contract.
Basis: Basis = Spot rate − Futures price; Basis falls to zero at expiry.
Basis at closing: Closing basis = Opening basis × (Months left at closing ÷ Months from opening to expiry); Use this only when the question tells you to assume basis reduces evenly, or gives no other estimate.
Estimated closing futures price: Closing futures price = Closing spot rate − Closing basis; Same sign convention as the opening basis.
Futures gain or loss: Gain or loss = (Closing price − Opening price) × Contract size × Contracts for a bought future; reverse the sign for a sold future; Equivalent to ticks moved × tick value × contracts.
Net outcome: Net result = Spot cash flow at closing date ± Futures gain or loss; Effective rate on the hedged part = opening futures price + closing basis (when you buy futures and the basis is spot minus futures).

How to solve Currency Futures Hedging questions

Use this order for any currency futures question. Write each figure down as you go, because marks are given for method.

1Identify the exposure: the currency, the amount, and whether you pay or receive on the exposure date.
2Choose the contract: the one that expires after the exposure date, and note its size, tick size and current price.
3Decide the position: buy futures if you pay the contract currency, sell if you receive it.
4Calculate the number of contracts: exposure ÷ contract size, rounded to a whole number. Note the unhedged part.
5Find the opening basis (spot − futures) and reduce it for the time left at closing to estimate the closing basis.
6Estimate the closing futures price: closing spot − closing basis. Then work out the gain or loss on the futures, in ticks or per unit.
7Calculate the spot cash flow at the closing spot rate, including the unhedged amount, and combine with the futures result.
8State the net cost or receipt, and the effective rate. Comment briefly on basis risk and rounding if asked.

Quickest way: Effective rate shortcut

When to use it: Use when the question asks only for the net outcome and the exposure is an exact multiple of the contract size, or when you want to check a full workings answer.

Work out the closing basis using the time left.
Effective rate on the hedged amount = opening futures price + closing basis (if basis = spot − futures).
Multiply the hedged amount by this rate to get the net result.
Deal with any unhedged amount separately at the closing spot rate.
Check against the full method: closing spot ± futures gain per unit should give the same rate.

Common mistakes in Currency Futures Hedging

Buying futures when you should sell, or the reverse.
Students think about the company's home currency instead of the currency being exposed.
Fix: Ask: will I pay or receive the contract currency? Pay means buy, receive means sell. Write it down before any figures.
Using the closing spot rate as the closing futures price.
Students forget basis does not disappear until expiry.
Fix: Always compute closing futures price = closing spot − closing basis. Only use spot as the futures price if the contract expires on the exposure date.
Reducing basis by the wrong fraction of time.
Students use months elapsed instead of months remaining, or use the wrong expiry date.
Fix: Closing basis = opening basis × months left to expiry at closing ÷ months from opening to expiry.
Not rounding contracts to a whole number, or ignoring the unhedged balance.
The division gives a decimal and students carry it into the answer.
Fix: Round to the nearest whole contract. Convert the unhedged currency at the closing spot rate and add it to the total.
Getting the tick value wrong.
Students multiply the tick size by the number of contracts only, forgetting contract size.
Fix: Tick value = contract size × tick size. Then ticks × tick value × contracts.
Treating a future as a guaranteed rate like a forward.
Both are used to fix a price, so students assume the outcome is certain.
Fix: State that futures leave basis risk and rounding differences. The result is only approximately fixed.

Worked examples

Example 1

A US company must pay £1,500,000 in 3 months. Sterling futures contract size is £62,500, tick size $0.0001. Today's spot is $1.2650 per £. The futures contract expires in 4 months and the current futures price is $1.2610. In 3 months the spot rate is $1.2800. Assume basis falls evenly to zero at expiry. Calculate the net cost in dollars using futures.

Show the solution

The company pays sterling, so it buys sterling futures.
Number of contracts = 1,500,000 ÷ 62,500 = 24.
Opening basis = 1.2650 − 1.2610 = $0.0040.
At closing one month is left out of four, so closing basis = 0.0040 × 1/4 = $0.0010.
Closing futures price = 1.2800 − 0.0010 = $1.2790.
Gain on futures = (1.2790 − 1.2610) × 1,500,000 = 0.0180 × 1,500,000 = $27,000. Check in ticks: 180 ticks × $6.25 × 24 = $27,000.
Spot cost = 1,500,000 × 1.2800 = $1,920,000.
Net cost = 1,920,000 − 27,000 = $1,893,000. Effective rate = 1,893,000 ÷ 1,500,000 = $1.2620 per £, which equals 1.2610 + 0.0010.

Answer: Net cost is $1,893,000, an effective rate of $1.2620 per £.

Example 2

A US company expects to receive €2,800,000 in 2 months. Euro futures contract size is €125,000, tick size $0.0001. Spot is $1.0950 per €. The futures price is $1.0900 and the contract expires in 5 months. In 2 months the spot rate is $1.0700. Assume basis falls evenly to zero at expiry. Calculate the dollar receipt using futures, rounding to whole contracts.

Show the solution

The company receives euros, so it sells euro futures.
Number of contracts = 2,800,000 ÷ 125,000 = 22.4, so 22 contracts. Hedged amount = 22 × 125,000 = €2,750,000. Unhedged = €50,000.
Opening basis = 1.0950 − 1.0900 = $0.0050.
At closing 3 months remain out of 5, so closing basis = 0.0050 × 3/5 = $0.0030.
Closing futures price = 1.0700 − 0.0030 = $1.0670.
Futures were sold at 1.0900 and bought back at 1.0670, so gain = 0.0230 per € × 2,750,000 = $63,250. Check in ticks: 230 × $12.50 × 22 = $63,250.
Spot receipt = 2,800,000 × 1.0700 = $2,996,000.
Total receipt = 2,996,000 + 63,250 = $3,059,250.

Answer: Total dollar receipt is $3,059,250. The hedged €2,750,000 is effectively converted at $1.0930 and the €50,000 balance at the spot rate of $1.0700.

Exam tips

Write the position (buy or sell) and the number of contracts first. These are easy marks and the examiner can follow your method even if later arithmetic slips.
Show basis working in a clear line each time: opening basis, time fraction, closing basis, closing futures price.
Always deal with the unhedged remainder. Many students lose marks by ignoring it after rounding the contracts.
In longer questions, compare futures with forward and money market hedges, and state the effective rates side by side. Then recommend with reasons such as certainty, flexibility and cost.
Link the answer to the scenario in your professional skills: say what the result means for the company's cash flow and what basis risk could do to it.

Practice questions from The use of financial derivatives to hedge against forex risk

Currency Futures Hedging 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 Hedging: frequently asked questions

How do I calculate the number of currency futures contracts needed?

Divide the foreign currency exposure by the contract size. Round to the nearest whole number, because you cannot trade part of a contract. Any exposure not covered is converted at the spot rate on the exposure date.

What is the difference between futures and forward contracts in forex?

A forward is an over-the-counter contract that can be for any amount and date, and usually ends in delivery. A future is standardised, traded on an exchange, needs margin and is marked to market daily. Futures are usually closed out before expiry, leaving some basis risk.

What is tick size and how is it used?

Tick size is the smallest price movement the exchange allows. Tick value is the contract size multiplied by the tick size. Multiply the number of ticks gained or lost by the tick value and the number of contracts to get the profit or loss.

What is basis in currency futures and why does it matter?

Basis is the spot rate minus the futures price. It falls to zero at expiry, so if you close out earlier the futures price is not the same as spot. This difference means the hedge is not perfect, which is basis risk.

How do I close out a currency futures hedge?

On the exposure date you do the opposite trade to your opening one: sell if you bought, buy back if you sold. The difference between opening and closing prices is your gain or loss. You add it to the spot cash flow to get the net result.