Forward contract notional concerned, principal, contract, currency, invested

AnalystForum

Jane lives in the US and has 30 million pounds invested in UK stocks.

She is concerned about currency and market risk for the next 90 days. To hedge she plans to use the FTSE 100 futures contract and the pound-forward contract to hedge market and currency risk respectively.

The US 90 day (annualised) risk free rate is 0.80%
The UK 90 day (annualised) risk free rate is 2.50%

What is the notional principal of the pound-forward contract if Jane hedges both market and currency risk?

Windjammer

30 million pounds

bboo

30m * (1+0.8% *90/360) = 30,060,000

wake2000

niraj_a Wrote:
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> shouldn't just the principal be hedged? am i
> remembering some other LOS?

Me too; I remember that question on a mock exam or something and I got it wrong because I tried to get all fancy. I believe that you just hedge the principal and the forward price will incorporate the interest earned. So really you hedge $30m of notional which will cost you $29.XX million dollars at which point you get the $30m in the end. That's how it works in the real world anyways.