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Hedging Currency Exposure in Sterling Interest Rate Futures

Article Quant Q&A · Author: JamieC113
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Summary

The document asks whether a position in three-month sterling LIBOR futures should be hedged with GBP/USD futures by matching the contracts’ full notionals. The reply challenges that approach by distinguishing a contract’s notional amount from the actual currency exposure created by holding it. It identifies variation in margin currency and profit or loss as the relevant sources of exposure.

The practical lesson is that the hedge size should be based on the currency amounts genuinely at risk, rather than automatically matching the underlying futures notional. If margin is posted in sterling, that margin creates an exposure, and changes in the position’s profit or loss can also create currency exposure. The exchange does not quantify either amount or provide a hedge ratio, so it is not a complete sizing method. The appropriate hedge depends on contract terms, margin arrangements, and the trader’s intended exposure.

Key ideas

  • A futures contract’s notional does not necessarily equal the holder’s currency exposure.
  • Currency exposure can arise from margin posted in a foreign currency and from position profit or loss.
  • A currency hedge should reflect those exposures instead of mechanically matching contract notionals.
  • The discussion gives no numerical hedge ratio, so contract and margin details are needed for sizing.

Tags

FuturesForexFixed incomeRisk management
Full text
# Currency hedging 3 month sterling libor futures


# Currency hedging 3 month sterling libor futures












Each libor contract is 500,000 gbp. Can I hedge it by going short 8 gbp/usd futures per libor to hedge out currency risk considering each gbp/usd futures is 62,500 British pounds?

## Answer by user42108 (score 2, accepted)

https://quant.stackexchange.com/a/68027

Why would you need to hedge the full notional? Your currency exposure is via the margin (if you post in GBP) and the PNL, neither of which are anywhere near as much as the notional.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.