Hi All,
I came across a question in a Kaplan 2014 mock exam in which the answer suggested in general futures are less costly than options when hedging currency. There wasn’t any specifics in the item set related to the question.
Any thoughts on this? Futures require margin on a per contract basis which is often time much more expensive than options in reality in my experience. Also would depend on the time period as well for the hedge in question.
Thanks.
The initial margin in futures contracts is rather a liquidity issue than cost; it’s still your money albeit frozen. An option premium is a real cost and not recoverable.
Right but the Futures contract is a foregone cost as well if its moves against you just as the option cost if foregone if it does not have a value greater than the purchase price.
Upfront cost is what I understood is discussed.
2 things - a) futures cost is a margin requirement. and b) there is a mark to market that occurs daily.
both of these I believe make the futures cost smaller.
An initial margin for a futures position is not a gain or loss nor is it truly a sunk cost, it’s just posting collateral. An option premium is an actual upfront cost.