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Ways to hedge a USD cash receipt due March 2023


Ricardo33

Question

I am due a payment in USD in March 23, and want to lock in the current GBP / USD rate. I can see three ways to do this: 1. via a simple DFB spread bet, short USD (to match the asset value due in March 23) but this is probably expensive with daily rollover and admin charges. 2. via a future spread bet (March 23), short USD. This looks very attractive today since the rate is good and spread very small, but does the spread widen progressively as the contract nears maturity to cover the funding costs etc.? If so, can I try and calculate this today? 3. Via a traditional option, buy a USD Put maturing March 2023 (all available on IG I think). This looks expensive today (about 5%), but doesn't require margin calls over the contract period  (1. and 2. do require margin calls and I have enough GBP today to cover those). The IG dealing page for options, does show a margin requirement, but I assume this actually means a premium to pay on the transaction, rather than a margin? I am trying to understand the mechanics of each (particularly how the price / spread on the March 2023 Future Spread Bet can be expected to change over time and whether the Option is a traditional option with no further action until maturity). Thanks!

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Hi @Ricardo33

Thanks for reaching out, 

When considering which would be more beneficial between the futures and the spot rate you can use the below formula: 

Futures spread - Spot spread / (0.8%* x spot price / 360)

*0.8% - annual admin fee for FX on the spot contract

Using current spread rates and assuming the use of the Mar23 forward: 

10.5 - 1.5 / (0.8% x 10893.5 / 360) = 37.178

Therefore if you intend to hold the position for longer than 37 days it would be cheaper for you to trade the Mar23 forward. 

Regarding the 3rd option the margin would be your premium x bet size. Your bet size will be determined by the notional amount that you are looking to hedge i.e. the amount that you expect to receive in USD. As you are looking to be long cable on your hedge you should be looking at buying a call rather than buying a put. Selection of strike price adds a complication.

So possibly best to use the FX forward to remain essentially neutral to price change . 

All the best, 

Anda

 

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