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assumed that the date today is 1 March 2016
.Sale of equity investment in the European country
It is expected that Lirio Co will receive Euro (€) 20 million in three months’ time from the sale of investmentThe following exchange contracts and rates are available to Lirio Co.
Per €1
Spot rates $1·1585–$1·1618
Three-month forward rates $1·1559–$1·1601Currency futures (contract size $125,000, quotation: € per $1)
March futures €0·8638
June futures €0·8656how to calculate expected futures price (based on a linear narrowing of
basis)@yazin1992 said:
assumed that the date today is 1 March 2016.Sale of equity investment in the European country
It is expected that Lirio Co will receive Euro (€) 20 million in three months’ time from the sale of investmentThe following exchange contracts and rates are available to Lirio Co.
Per €1
Spot rates $1·1585–$1·1618
Three-month forward rates $1·1559–$1·1601Currency futures (contract size $125,000, quotation: € per $1)
March futures €0·8638
June futures €0·8656how to calculate expected futures price (based on a linear narrowing of
basis)Please don’t repeat the same question (we always answer within 24 hours, but we do not sit permanently at the computer – I do have to sleep 🙂 )
March futures finish on 31 March, and June futures finish on 30 June – June finishes 3 months after March.
The receipt will be in 3 months time and so is on 1 June which is 2 months after 31 March, and so the examiner has taken the March futures price and added on 2/3 of the difference between the March and June futures prices, to adjust for the extra 2 months (on the assumption that it changes linearly).Strictly better would have been to calculate the lock-in rate (which the examiner wrote was acceptable) and there is a free lecture on here explaining how to calculate lock-in rates.
So to get the lock in rate for this question, as per my working
spot rate minus June futures —-1.1585-0.8656
=0.2929*2/4
=0.14645final answer doesn’t work here?
one thing i notice here is
spot rate quoted in $/euro
futures quoted in Euro/$
could u pls help me outpremium payable is 674250 euros so to convert into dollars we pay premium so buy dollar rate is 1.1585 is that so??
You convert a spot rate quoted as $ per €, to a € per $ quote by taking the reciprocal.
So the spot rate € per $ = 1/1.1618 to 1/1.1585 = 0.8607 – 0.8632So the basis = (0.8656 – 0.8632) x 1/4 = 0.0006
So the lock-in rate = 0.8656 – 0.006 = 0.8650
For the premium the rate is 1.618 (as per the answer!) – they are buying €’s.
For the dividend per share, you divide the total available ( $4.76M) by the number of shares ( $80M)
Finding the reciprocal is ryt but why minus both the spot rates 0.8607 – 0.8632?
Why 1/4, it should be 2/4 ryt transaction date is 1may then untill end of june so overall from 1st march to june there are 4 months then it should 2/4 ..???????????for the premium, can u elaborate a bit??? pls1.1618, can I assume for receipts it should be the second rate?????
we are receiving euros so we need to convert into dollars we need to use 1.1585 ryt?
im confused here pls help me out?First – I was not minusing at all.
Writing 0.8607 – 0.8632 is the normal way of showing the two rates (for buying and selling).Second – from now (1 March) to the date of the transaction is three months.
From now (I March) to the end of the June future (30 June) is 4 months.
Therefore at the date of the transaction the basis will be 1/4 of what it is now.The premium is not receiving anything – you pay a premium!
Q1)
from 1st march to 3 months its 1st may ryt then end of may and end of june equals 2?Q2)
We have to pay premium i know that but the amount as per question is in euros so from here can u explain me pls, I can understand everything how things work this small bit confusing me?
why do we take 1.168 instead of 1.1585???
they buy euro u mentioned this earlier can u get me to the end pls??in yr answer u minus (0.8656 – 0.8632) we should first minus from spot rate to the futures ryt?
we anyway have to pay premium so since we are receiving in Euro we buy euro buy rate and pay is that so???
Hay you ask too much but actualy knows very little about syllabus.
First learn your course book then if you face some problem ask John.
They are here to help you my frend not to teach you everything.
Hope you understand and care next time and please dnt try to take unfair advantage of their support.
6shahir:
Q1 3 months from 1 March takes you to 1 June not 1 May !!
Q2 The exchange rate is always the one that is worst for us (it is the bank that makes the profit!!). Converting the premium at 1.585 would mean us paying less!
Q3 The current basis the difference between the current spot and the current futures. The basis reduces as so the lock-in rate will always be between the current spot and the current futures.
Q4 The premiums are quote in Euros and so we pay in Euros
yaseen
1. The current basis the difference between the current spot and the current futures. The basis reduces as so the lock-in rate will always be between the current spot and the current futures. You add or subtract accordingly.
2. We use the lock-in rate (we can predict the net effect). There is a free lecture explaining the lock-in rate.
3. The premium is quoted in Euros and we are using the correct rate for buying Euros.
pls, in this type of question of march/june 2016. can I still get full credit if i use mid market value where relevant so that i won`t bother my self from which is buy or sale rate? thanks
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