- This topic has 1 reply, 2 voices, and was last updated 10 years ago by
.
- Posts
Hi john,
I have learned from your lectures that to estimate futures price we need to spot rate on the future date . But in this question we do not have the future spot rate and in examiners answer he has used 2 methods,https://www.accaglobal.com/content/dam/acca/global/PDF-students/acca/p4/exampapers/J14_P4_Ans_.pdf
both of which i dont get as there is no explaination to them . Could u please elaborate how to do that . thanks
You have two choices (both of which will get you the marks).
Either assume a spot rate (and reasonable rate) and then work through as in the lecture.
Alternatively you can calculate a rate that gives the net effect of converting the transaction at spot and bringing in the profit or loss on the futures. You will know from the lecture that the reason for not having a ‘perfect hedge’ on the contract amount is simply because of the change in the basis over the period. So…..we can predict the net effect – it will be the current futures price as adjusted by the change in the basis. This is called the lock-in rate.
It is your choice which of the two approaches you find the easiest.
- You must be logged in to reply to this topic.