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Foreign exchange risk management (1) Part 7 – ACCA (AFM) lectures

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  3. Hi John, Thanks for this amazing lecture. Just a quick question, at time stamp 23:36, for calculating the number of days, it should be 10 days in June + 31 in July + 31 in Aug and 30 days in Sep, should it not?

  5. Hi, I’m not sure why the basis risk is only 0.0067 at August 31 st in example 10. Don’t you have 3 periods for the futures (July 30, August 31, September 30)? If the spread starts at 0.02 at July 1, the spread will reduce by 0.0067, 0.0067 *2, and 0.0067 * 3 at July 30, August 31, and September 30 respectively. Which means that at August 31, the spread (basis risk) would be “reducing” the spot rate by 0.02/3*2 or 0.0134 to close the gap with the futures rate?

    • Remember the as we are assuming the difference between the spot and the futures falls linearly to zero the keeps reducing by .0067. Therefore by 31st Jul the Remaining Basis will be 0.0133 and by the 31 Aug it would be 0.0067. Hence why now you can use the remaining basis of 0.0067 to calculate the futures price.

    • To pay the supplier we are buying $’s and so convert at 1.4791.

      We are receiving a $ gain on the futures therefore we need to sell $’s and so convert at 1.4812.

      (What they could do is use the $ gain on the futures to part pay the $500,000 and so only the net $ amount would need to be converted at 1.4791). Either is acceptable in the exam.

      • Hi John, as I was watching example 11 , this was my thought too.

        Presumably in real life this is the better option as you save (by avoidance) twice on the spread ie the $1281.25 to GBP for the hedge, and the reduction of GBP required as now we need (500000-1281.25) $498,718.75?

        thanks

  7. that was amazing, just one doubt , at the end while we convert the profit to pounds should we use the buy rate ie the smaller rate or sell ie the higher rate ? , as in this case we need to pay dollars hence buy dollars and sell pounds so shouldn’t we be using the buy rate for that conversion?

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