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Chapter 16

Example 7

Expiry date

Choose the first expiry date after the transaction.

The transaction is due to take place in February X6, so we choose March X6
expiry.

Number of contracts

We need to get the transaction and contract in the same currency.

Use the strike price to convert.

$5 million / 1.3076 = £3,823,799

Contract size = £62,500

3,823,799/62,500 = 61.18

Using the usual rules of rounding, 61 contracts (this will lead to a slight under
hedge.)

Step 2

Pay the margin:

61 × $1,000 = $61,000

Convert to GBP @ spot:

$61,000/1.2980 = £46,995

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