A Novel Approach to Transactions-Based Currency Exposure Management

In the traditional futures hedging situation, gains or losses due to price movement of the underlying exposure are offset by losses or gains in the futures hedge. The futures hedge effectively serves to lock in a price. This note demonstrates that, by buying options, where the consolidated delta of the option position equals the alternative futures hedge ratio, the hedger may be able to generate results superior to those of the traditional futures hedge in both rising and falling price environments.