AFM Technical Article Podcast: Exchange traded foreign exchange derivatives

AFM students need to know both foreign exchange futures and options for hedging. Here’s a structured way to approach exam questions:

• FX futures basics – choose the contract after the transaction date, match buy/sell with exposure, calculate number of contracts, then work out effective rate using basis.
• Key exam points – margins, marking to market, maintenance margin & margin calls. Don’t forget these practical issues.
• FX options basics – choose call/put depending on exposure, compare exercise prices net of premiums, calculate contracts.

Exam tips –
Show minimum net receipt/payment clearly
Use hedge ratio (delta) if given, to adjust contract numbers

Remember: buyer of put = short in the underlying currency, but long the option

These topics are highly examinable — marks come from both calculations and commentary (e.g. advantages, limitations, or advice to the company).

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