Currency option

in currency future spot rate is 94(100-current libor 6) and we have opt for for 93.79..basis risk will be .21% and in future closed out price is 93.5(100-6.5 libor) less remaining basis risk .03=93.47%
gain at future market
sell (93.47-93.47)*40*500000*3/12=16000

my question is this that if we sell currency future at 93.79 the remaining amount will be of interest payment 6.21% and we can buy at 93.47 the remaining amount will be of interest 6.53%…in selling we have 6.21% it means we will earn this interest and in buying we have 6.53% its means that we have to pay that much interest…so how can we have gain if we are paying more interest ……?

also tell that what basis risk means and on which factor it depends?

@faizankhan111 said:
in currency future spot rate is 94(100-current libor 6) and we have opt for for 93.79..basis risk will be .21% and in future closed out price is 93.5(100-6.5 libor) less remaining basis risk .03=93.47%
gain at future market
sell (93.47-93.47)*40*500000*3/12=16000

my question is this that if we sell currency future at 93.79 the remaining amount will be of interest payment 6.21% and we can buy at 93.47 the remaining amount will be of interest 6.53%…in selling we have 6.21% it means we will earn this interest and in buying we have 6.53% its means that we have to pay that much interest…so how can we have gain if we are paying more interest ……?

also tell that what basis risk means and on which factor it depends?

These are not currency futures – they are interest rate futures.

Although the prices of the futures change with interest rates, they are not interest rates. So when you buy and sell, the profit is the sell price less the buy price (divided by 400 as you say). They do not convert the futures prices into interest rates, so not think in terms of interest rates.
If the sell price is higher than the buy price then there is a profit. If the sell price is lower than the buy price then there is a loss.

Futures and interest rates are two different things. The futures prices are actually based on government stocks, and will vary as interest rate vary, but because they are not the same thing, they will not be exactly the same.
So……although 6% interest rate is equivalent to a futures price of 94.00, the actual futures price will be a little bit different. Also, if the interest rate was to go up by (say 1%) then the futures price will fall, but not by exactly the same amount.

It is because of this that dealing in futures will not be an exactly perfect hedge. The difference is what is called basis risk.

i was given a whole bunch of figures when deal with options. can i know what does that mean and how am i suppose to choose the right figure to use in the case. honestly, i got no idea at all about options. many thanks.

@huilincheah said:
i was given a whole bunch of figures when deal with options. can i know what does that mean and how am i suppose to choose the right figure to use in the case. honestly, i got no idea at all about options. many thanks.

It is impossible to teach everything about options on a forum.

Have you watched my lectures on futures and options on this website? They are free!!

His answers are very confusing, but what he is saying is that at the end of 2008, the receivables days are 32 days (25.6/288.1 x 365), that the inventory days are 8 days (3.2/143.2 x 365), and that payables days are 22 days (8.8/143.2 x 365).

So the working capital cycle is 32 + 8 – 22 = 18 days. This means that the finance for these 18 days needs to be found.

Although the company has plenty of cash brought forward, they should not distribute as dividend more than they are actually generating during the year. From the cash flow statement it is clear that if they distribute 28, then the cash balance will fall by 4.