Question
c. Answer to the following questions about futures contracts: i. When hedging currency risk with future contracts, you will find that futures markets have three
c. Answer to the following questions about futures contracts: i. When hedging currency risk with future contracts, you will find that futures markets have three limitations that you do not find in forward markets. Describe what these three limitations are in the context of currency markets. [6 marks] ii. Consider a situation where your company is exposed to one unit of a foreign currency (FC). In particular, your company receives FC 1 in six months. Briefly discuss how you can use a futures contract to hedge this exposure under the constraints described in the previous part. Use the appropriate mathematical formulas. [8 marks] iii. Briefly describe the method used to determine the optimal number of futures contracts. [6 marks]
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