Objective Exemplify the use of futures, forwards and options
Outline Introduction A long hedge using futures A short hedge using futures Hedging with call options Hedging with put options Knowing what position to take when hedging
A long hedge with foreign currency futures On July 1, an American auto-dealer buys 20 Jaguars from England at L 35,000/car. The payment - in pounds - is due on November 1. The buyer wants to hedge against a possible appreciation of the pound against the dollar.
Analysis: total cost of the auto-dealer under different scenarios
A short hedge with foreign currency futures On April 3 an American firm decides to transfer L 10,000,000 from London to New York, to a dollar denominated account. The transfer will be made on September 29. The firm fears that the pound will depreciate against the dollar.