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Could you help me understand how it arrived at predicted future rate based on the current spot rate?
1.0635+[(1.0659-1.0635)*4/6]=1.0651
If the spot rate on the hedge date is not given, how to estimate the future rate according to unexpired basis?The rate that the examiner has calculated is not in fact a prediction of what the futures price will be, it is the lock-in rate (the net effect of converting the transaction at whatever spot turns out to be, and the profit or loss on the futures deal). If we are not told what the spot rate is at the date of the transaction then we have to calculate the lock-in rate and use that – this is the most common situation these days in the exam.
It will help you to watch my free lectures on the calculation of the lock-in rate.
Also, if you go to the link for ‘revision kit live’ from the main P4 page on this website you will find lectures working through the whole of the question CMC.
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