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ACCA Applied Skills · Financial Management · Hedging techniques for foreign currency risk

Which of the following statements about hedging foreign currency risk with exchange-traded currency futures is correct?

Currency futures have standard contract sizes and settlement dates, so the hedge rarely matches the exposure exactly because the number of contracts must be rounded. Forwards, not futures, are tailored. Futures also need initial margin and daily variation margin.

  1. AContracts are tailored to the exact amount and date of the exposure, so the hedge is always perfect
  2. BContracts have standard sizes and settlement dates, so the hedge is usually not exactly matched to the exposureCorrect
  3. CNo margin is required, because the exchange guarantees performance of the contract
  4. DThe hedger is committed to the exchange rate fixed at the outset, with no further cash flows until the settlement date

Explanation

Exchange-traded futures are standardised in contract size and expiry dates, so the number of contracts is rounded and the hedge is rarely exact. Tailored contracts describe forward contracts, not futures. Futures also require initial margin and daily variation margin, so cash moves before settlement.

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