# Hedging Specifics Flashcards

1
Q

How do you calculate the number of contracts for interest rate products?

A

Loan Size/Contract Size x Duration/3months

2
Q

How do you calculate the number of contracts for Index products?

A

Portfolio value/(Futures price or strike price x £10)

3
Q

How do you calculate the number of contracts for currency products?

A

Amount of currency/Contract size - MAKE SURE THEY ARE IN THE SAME CURRENCY

4
Q

How do you determine whether to buy or sell with interest rate products?

A

5
Q

How do you determine to sell or buy index products?

A

Selling a portfolio: OR Protecting a portfolio

6
Q

How do you determine to sell or buy index products?

A

Selling a portfolio: OR Protecting a portfolio

7
Q

How do you determine whether to buy or sell currency products?

A

Protecting = PUT

8
Q

How do you calculate a profit or loss on an interest future rate product?

A

Will be a percentage therefore multiply the outcome by:

3/12 x 500k x no of contracts

9
Q

How do you calculate a profit or loss on an interest future index products?

A

Will be in points, therefore multiply the outcome by £10 x no of contracts.

E.g. Index goes from 5000 to 4100.

900 x £10 = 9,000
x 112 contracts = £1,080,000 gain

10
Q

How do you calculate a profit or loss on an interest future currency products?

A

Profit/loss will be in denominated currency per £ therefore multiply by

Contract size x no of contracts

Then translate back to £!

E.g. Futures currently trading at 1.6496
Payment of 1,550,000 dollars

£62,500 contract size

= 1,550,000/1.6496/62,500 = 15 contracts

Future spot = 1.6400

(1.6496 - 1.6400) x 15 x 62,500 = gain

Deduct a gain from a payment/Add a gain to a receipt and then divide by the future spot rate

11
Q

How do you calculate a premium on future interest rate options?

A

Will be a %, therefore multiply the outcome by

3/12 x 500k x no of contracts

12
Q

How do you calculate a premium on future index options?

A

Will be in points, therefore multiply the outcome by:
£10 x no of contracts

e.g. the ut premium is 70 points in December =

70 x £10 x number of contracts

13
Q

How do you calculate a premium on currency futures contracts (options only)?

A

Premium will be in denominated currency per £ therefore multiply by:

Contract size x no of contracts

Then convert back to £!!

14
Q

How do you approach any traded options questions?

A

Approach to cope with any traded options question:
1 Decide whether to buy a call or a put
2 Decide what expiry date to pick (the next date AFTER you expect to act)
3 Calculate the number of contracts
4 Decide what strike price to choose (therefore what is the premium)
5 Show the calculation (three elements)
£ £
Transaction at the market rate (easy) X/(X)
Futures position
Price now X
Price later X
Profit/Loss X/nil X /nil

× amount per contract × no of contracts

Overall position X

15
Q

Currency Hedging - Futures and Traded Options - what expiry date do you pick?

A

The first date AFTER the settlement date (i.e. if the settlement date is mid-May and there are March or June contracts on offer – you need the JUNE contracts).

16
Q

Index hedging - which date do you pick?

A

The first date AFTER they need to sell (i.e. if they want to protect against prices falling until 10 July, then buy September contracts).

17
Q

Interest rate hedging - Futures and traded options - What expiry date to pick?

A

Pick the first date AFTER the borrowing/lending starts – e.g. If you need to borrow on 31 March, use March contracts. If you need to borrow on 3 August, use September contracts.