Strategic Financial Management · Foreign Exchange Risk Management

Currency Futures and Options Hedging for CMA Final

Updated 11 October 2026 · Fact-checked

Currency futures lock in an exchange rate through a standardised exchange-traded contract. Currency options give the right, not the duty, to buy or sell currency at a strike price for a premium. To solve a numerical, find the exposure, choose the position, compute the gain or loss, and compare net rupee outcomes.

Understand Currency Futures and Options

A company with a future foreign currency payment or receipt has exchange rate risk. An importer who must pay dollars fears the dollar will rise. An exporter who will receive dollars fears it will fall. Hedging fixes or limits the rupee outcome.

A currency future is a standardised contract traded on an exchange to buy or sell a fixed amount of currency at a set rate on a set date. The USD-INR contract is for USD 1,000 and is quoted in rupees per dollar. It is settled in rupees and not by delivering dollars. The exchange clears it and you pay margin, with daily marking to market. You hedge by taking a futures position opposite to your exposure. An importer buys futures. An exporter sells futures. The gain or loss on futures offsets the change in the spot rate, so the net rate is close to the futures rate you entered at.

A currency option gives the buyer a right and the seller an obligation. A call gives the right to buy currency at the strike price. A put gives the right to sell. The buyer pays a premium upfront, and this is the most the buyer can lose. An importer buys a call to cap the cost of dollars. An exporter buys a put to set a floor on the rupees received. If the spot rate moves in your favour, you let the option lapse and gain from the move.

Futures and forwards both fix a rate, but they differ. A forward is a private contract with a bank. It can be tailored to any amount and date and is settled on maturity. A future is standardised, exchange-traded, margined daily and carries little counterparty risk. Futures are rigid in size and date, so the hedge may be slightly imperfect. Options cost a premium but keep the upside. Futures and forwards cost no premium but give up the upside.

In the exam, you are usually asked to compute the net rupee amount under each alternative, and then recommend one with a reason.

Key rules to remember

Number of futures contracts: Contracts = Foreign currency exposure ÷ Contract size; For USD-INR the contract size is USD 1,000. Round to a whole number of contracts and state any unhedged balance.
Gain or loss on futures: Long: (Exit price − Entry price) × Contract size × Contracts. Short: (Entry price − Exit price) × Contract size × Contracts; Importer is long. Exporter is short. Assume futures converge to spot at expiry unless the question gives an exit price.
Call option buyer payoff: Max(Spot − Strike, 0) − Premium, per unit; Exercise only if spot is above strike. Maximum loss is the premium.
Put option buyer payoff: Max(Strike − Spot, 0) − Premium, per unit; Exercise only if spot is below strike.
Effective rate with a call (importer): Maximum cost per unit = Strike + Premium. If spot is below strike, cost = Spot + Premium; Add interest on the premium only if the question asks for it.
Effective rate with a put (exporter): Minimum receipt per unit = Strike − Premium. If spot is above strike, receipt = Spot − Premium; This is the floor. Above strike the exporter keeps the upside, less the premium.
Break-even against a forward: Put: option is better if Spot − Premium > Forward rate. Call: option is better if Spot + Premium < Forward rate; Use this to say at which spot rates each alternative wins.

How to solve Currency Futures and Options questions

Use this order for any question on hedging with currency futures or options.

1Identify the exposure: amount, currency, date, and whether you will pay or receive the foreign currency.
2Decide the hedge: importer buys futures or a call. Exporter sells futures or buys a put.
3For futures, compute the number of contracts as exposure ÷ contract size. Note the entry price.
4For each given spot rate at expiry, compute the futures gain or loss, or decide whether the option is exercised.
5Compute the net rupee amount: spot transaction plus or minus the futures result, or the option result less the premium.
6Compare with the other alternatives, such as forward, money market or no hedge, using the same exposure.
7Recommend one alternative with a reason, for example certainty, cost, or keeping the upside, and state what you assume.

Quickest way: Effective-rate shortcut

When to use it: Use it when the question asks for the net rupee outcome at a few spot rates, or asks which hedge is cheaper.

With futures, the net rate is the entry futures rate (if futures converge to spot). Multiply by the exposure.
With a bought call, the cost per unit is the lower of spot and strike, plus premium.
With a bought put, the receipt per unit is the higher of spot and strike, minus premium.
Multiply each per-unit result by the exposure and compare in a small table.
Find the break-even spot against the forward rate and state the range in which each alternative wins.

Common mistakes in Currency Futures and Options

Taking the wrong side of the futures
Students mix up long and short, or hedge the rupee side instead of the dollar side.
Fix: Importer owes dollars, so buy dollar futures. Exporter will receive dollars, so sell dollar futures. Ask: do I lose if the dollar rises or falls?
Forgetting the premium or counting it on the wrong side
The premium is paid upfront and the option payoff looks complete without it.
Fix: Subtract the premium from put receipts and add it to call costs. Do it per unit before multiplying.
Exercising an option that is out of the money
Students apply the strike automatically instead of comparing it with spot.
Fix: Call: exercise only if spot > strike. Put: exercise only if spot < strike. Otherwise deal at spot and lose only the premium.
Wrong number of contracts
Students ignore the contract size or use rupees instead of dollars.
Fix: Divide the dollar exposure by USD 1,000 for USD-INR. State any remainder that stays unhedged.
Treating futures like forwards with no daily settlement
Both fix a rate, so the differences are skipped.
Fix: Mention margin and mark-to-market, standard sizes and dates, and exchange clearing. A forward is customised and has bank counterparty risk.
Recommending a hedge without a reason
The calculation ends at the numbers.
Fix: Give the recommendation with the break-even or the outcome range. Say the option keeps the upside at the cost of the premium.

Worked examples

Example 1

An Indian importer must pay USD 50,000 in three months. It buys USD-INR futures (contract size USD 1,000) at ₹83.40. Find the net rupee cost if the spot rate at expiry is (a) ₹84.10 and (b) ₹82.60. Assume futures settle at the spot rate on expiry.

Show the solution

Exposure is USD 50,000 payable, so the importer buys futures. Contracts = 50,000 ÷ 1,000 = 50.
Case (a): futures gain = (84.10 − 83.40) × 50,000 = 0.70 × 50,000 = ₹35,000.
Spot cost of dollars = 50,000 × 84.10 = ₹42,05,000. Net cost = 42,05,000 − 35,000 = ₹41,70,000.
Case (b): futures loss = (83.40 − 82.60) × 50,000 = 0.80 × 50,000 = ₹40,000.
Spot cost = 50,000 × 82.60 = ₹41,30,000. Net cost = 41,30,000 + 40,000 = ₹41,70,000.
Check: 50,000 × 83.40 = ₹41,70,000 in both cases.

Answer: Buy 50 futures contracts. The net cost is ₹41,70,000 (₹83.40 per USD) under both rates, so the cost is fixed. The importer gives up the benefit of the fall to ₹82.60.

Example 2

An exporter will receive USD 1,00,000 in three months. A put option on USD is available with strike ₹83.00 and premium ₹0.60 per USD. The three-month forward rate is ₹83.20. Ignoring interest on the premium, find the net receipt under the put if the spot rate at expiry is (a) ₹81.50 and (b) ₹84.50. Compare with the forward and advise.

Show the solution

The exporter fears a fall in the dollar, so it buys a put.
Case (a): spot 81.50 is below strike 83.00, so exercise. Receipt per USD = 83.00 − 0.60 = ₹82.40. Total = ₹82,40,000.
Case (b): spot 84.50 is above strike, so let the put lapse and sell at spot. Receipt per USD = 84.50 − 0.60 = ₹83.90. Total = ₹83,90,000.
Forward: 1,00,000 × 83.20 = ₹83,20,000 in every case.
Put is better than the forward when Spot − 0.60 > 83.20, that is, when spot is above ₹83.80.
Below ₹83.80 the forward gives more. The put's worst case is ₹82.40 per USD, which is ₹0.80 below the forward.

Answer: Put: ₹82,40,000 at spot ₹81.50 and ₹83,90,000 at spot ₹84.50. Forward: ₹83,20,000. The put wins only if spot at expiry is above ₹83.80. Choose the forward for certainty. Choose the put if you expect the dollar to strengthen and can accept a floor of ₹82.40 per USD.

Exam tips

Draw a small table of spot rate, futures or option result, and net rupee amount. It earns method marks even if one number is wrong.
Always state your assumptions, such as futures converging to spot and no interest on the premium or margin.
Finish with a recommendation. The break-even spot rate against the forward is a strong way to justify it.
For MCQs, remember that the option buyer's loss is limited to the premium. A future has no premium but carries margin and mark-to-market.
Check the direction of the hedge first. A wrong long or short position makes every later figure wrong.

Practice questions from Foreign Exchange Risk Management

Currency Futures and Options 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 and Options: frequently asked questions

What is the difference between currency futures and forwards?

A forward is a private, customised contract with a bank, settled at maturity. A future is standardised, traded on an exchange, cleared by a clearing house and marked to market daily with margin. Futures have little counterparty risk but less flexibility in size and date.

How does an exporter hedge with currency options?

An exporter buys a put option on the foreign currency. If the currency falls below the strike, the exporter exercises and receives the strike less the premium per unit. If the currency rises, the put lapses and the exporter sells at spot, less the premium.

How many futures contracts do I need to hedge an exposure?

Divide the foreign currency exposure by the contract size. For the USD-INR contract of USD 1,000, an exposure of USD 50,000 needs 50 contracts. Any balance that does not fill a contract stays unhedged.

When is an option better than a futures hedge?

An option is better when you want protection against an adverse move but also want to gain from a favourable move, and you can pay the premium. Futures cost no premium but lock in the rate and remove the upside.