# Hedging Specifics Flashcards

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

Loan Size/Contract Size x Duration/3months

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

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

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

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

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

Borrowing: SELL FUTURES (Buy Puts)

Lending/Depositing: BUY FUTURES (buy calls)

How do you determine to sell or buy index products?

Selling a portfolio: OR Protecting a portfolio

SELL FUTURES: Buy PUT

Buying a portfolio: BUY FUTURES (Call)

How do you determine to sell or buy index products?

Selling a portfolio: OR Protecting a portfolio

SELL FUTURES: Buy PUT

Buying a portfolio: BUY FUTURES (Call)

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

Protecting = PUT

Buying $/Euro and selling £ = Sell Futures (buy puts)

Selling $/Euro and buying £ = BUY Futures (Buy calls)

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

Will be a percentage therefore multiply the outcome by:

3/12 x 500k x no of contracts

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

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

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

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

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

Will be a %, therefore multiply the outcome by

3/12 x 500k x no of contracts

How do you calculate a premium on future index options?

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

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

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

Contract size x no of contracts

Then convert back to £!!

How do you approach any traded options questions?

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

Premium (X)

Overall position X

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

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).