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Hi sir
for qus such has this, can we use the basis risk movement method to calculate the 4 month future price when closing out the futures deal?
Bpp use a method where they find the difference between the 2month and 5month rate…
Thanks
BPP do that simply because the examiner did that!
However it isn’t really valid – better would have been to calculate a lock-in rate (which the examiner shows as an alternative)Sir examiner did the same in june 2014 Q1 sitting where he calculated the predicted future rate for four months and he ended just to the number of contracts and did not write the outcome .can we follow this approach
You can (although as I wrote before, strictly the lock-in rate is better)
Sir, another quick question on this.
Is it correct to use the four months forward rate to calculate the lock-in rate? I say this because i do recall the examiner noting on another question that we can assume the forward rate is equal to the spot rate at the date of transaction.
Does this makes sense?
It isn’t really correct. and it really depends a lot on assumptions.
Strictly the lock-in rate should be calculated from the current forward rate and the basis risk.
Quick question. .
Why use a 5 month contract of they need the money in 6 months time.
Is it because that’s what available?
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