Perfect Future Hedge
Perfect future hedge arise where the change in spot rate and
change in the future rate are same. For example the spot rate & future
today is 25 $ and $ 28 respectively and spot rate and future rate on 31
December is expected to be $ 30 & $ 33. It means that there is increase of
$ 5 both in sport rate and future rate and therefore this is a situation where
you can perfectly hedge your risk.
Example of prefect
Future Hedge
ABC Company base in USA is expected to receive sterling pound
125,000 on 31 December. Today is 01 January, 2015.
|
|
Spot Rate
|
Future Rate
|
|
01 January $/pound
|
1.8
|
1.7
|
|
31 December
|
1.7
|
1.6 for January
|
|
Standard contract
62,500
|
|
|
1.
Expected Receipt
The expected receipt is USD is 125,000 pound x 1.8 = 225,000
$
2.
Number of Contract required
|
Pound
|
125,000
|
|
Pound Sterling contract
|
62,500
|
|
Number of Contract
|
2 Contract
|
3.
Exchange currency in open market
|
Currency Pound – 125,000 pounds
|
|
|
Exchange Value rate ( 125,000 x 1.7)
|
212,500
|
|
Profit & Loss ( 1.7-1.6) X 125,000
|
12,500
|
|
Total
Receipt ( 212,500 + 12,500)
|
225,000
|
We can see
that this is a perfect hedge the amount we expected to receive on 01 Jan is the
same we received on 31 December and this is because of uniform change in sport
and future rate.
