A US firm sold goods to a British firm at an agreed price of 2,812,500 GBP...
A US firm sold goods to a British firm at an agreed price of 2,812,500 GBP which it will receive in December. The choose to manage this exposure using CME futures contracts:
-Contract: GBP / USD Futures
Expiry: December
Price: 1.6491
size: 62,500 GBP
maintenance margin: 1500USD
initial margin: 110% of maintenance margin
settlement: physical delivery
current spot value of the pound is 1.6524
a) how many futures contracts will they use to hedge their exposure and will they buy or sell said futures ?
b) what is the total size of the margin that would be required at the beginning to hedge this exposure ?
Homework Answers
(a) As the US based firm sells goods to a British Firm, the US firm has GBP receivable in December. This implies that if the GBP is considered to be the underlying asset, then the US firm is long on the same. Hence, in order to hedge against a long position, the US firm will sell future contracts (take a short position in derivatives i.e futures)
Receivable = 2812500 GBP and Futures Contract Size = GBP 62500
Therefore, Number of Contracts Required = 2812500 / 62500 = 45
(b) Maintenance Margin = 1500 USD and Initial Margin = 110% of Maintenance Margin = 1.1 x 1500 = $1650
Number of Contracts Sold = 45
Total Initial Margin Required = 45 x 1650 = $ 74250
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