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Sir thank you so much for amazing lecture.After listening to the lecture I feel like I am getting something.Earlier it was completely blank.I wanted to ask is the estimated future price and future price at close out are same.I am solving this above question through BPP and it says future price at close out are 92.96 ( for increase ie 7%) and 94.96(for decrease ie 5%) I am getting different figure could you please explain me how did they get this number from your way which you taught in lecture.
Many thanks.At present LIBOR is 6% which is equivalent to 94.00
The futures price is currently 93.88. So the basis is 94.00 – 93.88 = 0.12.
We assume that the basis falls linearly over the life of the future, and so on the date that the loan starts it will have fallen to 0.04.
If interest is 7%, this is equivalent to 93.00 and so the future price will be 93.00 – 0.04 = 92.96
If the interest is 5%, this is equivalent to 95.00 and so the futures price will be 95.00 – 0.04 = 94.96
Sir, why the answer in BPP practice kit they less the option premium?
It should be added in the borrowing cost is it? Since premium is a cost the company need to pay whether or not the options are exercise
They have added it!
I know they have typed the word ‘less’, but if you check the addition they have added it.
Can I ask a something about this question please? It quotes an open and settlement price for each future. I’m not used to seeing two figures! What do they mean? Thanks.
Edit…since I posted the above, I tried searching for the answer on Google. Is the opening price the first price of the day? And the settlement price the average of the opening and closing price of the day? And so should we ignore the opening price and use only the settlement price?
Yes – you use the settlement price.
However, this has only appeared once in the exam and it was a question set by the previous examiner.
The ACCA removed the previous examiner (partly because of questions like this one) and I will be surprised if the current examiner ever asks a question like this 🙂
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