2. Sample hedging with futures and options

3. Objective Exemplify the use of futures, forwards and options

4. 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

5. 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.

6. A long hedge with foreign currency futures

9. Analysis: total cost of the auto-dealer under different scenarios

10. 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.

11. A short hedge with foreign currency futures

14. Analysis: total proceeds from the transfer under different scenarios

18. Call option hedging A US importer has to pay € 62,500 to a German exporter in 60 days. Worst case scenario: DM will appreciate against the US$

19. Call option hedging

20. Put option hedging A US exporter has to receive € 62,500 from a German importer in 60 days. Worst case scenario: DM will depreciate against the US$

21. Put option hedging

22. Determining whether to buy or sell futures/forward when hedging Method 1: Worst case scenario Method 2: Current spot position Method 3: Anticipated spot transaction

23. Method 1: Worst case scenario What is the worst that could happen in the spot market? Take a futures position that will be profitable in the worst case scenario for the spot market.

24. Method 2: Current spot position Determine whether your current spot position is long or short:

25. Method 3: Anticipated spot transaction What spot transaction will you make when the hedge is terminated? Sell or buy an asset. Do the same today in the futures market