Hedging with futures versus options


A U.S. based MNC expects to receive royalty payments totaling £1.25 million next month. It is interested in protecting these receipts against a drop in the value of the pound.

It can sell 30 day pound futures at a price of $1.6513 per pound or it can buy pound put options with a strike price of $1.6612 at a premium of 2.0 cents per pound.

The spot price of the pound is currently $1.6560. And, if the pound's price in 30 days is $1.6400 then the futures rate is $1.6410.

Calculate the associated dollar gain or loss associated with hedging with futures vs. options.

Please show your calculation steps.

In your opinion, when should MNC aggressively hedge their foreign exchange risk?

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Finance Basics: Hedging with futures versus options
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