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Hello Sir,
I would much appreciate your input on the following :
Regarding currency futures, when it comes to calculating gain/loss on futures, most often, we need to estimate the spot rate @ date of receipt/borrowing in order to calculate the futures rate at date of receipt/borrowing, and hence the gain/loss on futures.
What I wanted to get some clarification on is if we can assume that the forward rate (if available) is equal to the spot rate @ date of receipt/borrowing? Or should we assume the spot rate @ date of receipt/borrowing will be equal to the current futures rate that is given?
I hope I made myself clear,
Looking forward to hearing from you,
Thanks.
Most often we do not need to estimate the spot rate at the date of the transaction!
We certainly cannot normally assume that the forward rate will equal the spot rate – that is very unlikely to be the case,
Most often we calculate the lock-in rate in the exam and use that.
This is all explained in my free lectures on foreign exchange risk and on interest rate risk.
Thanks for the prompt response.
I’ll watch the videos again and try to make sense of it.I was a bit confused because in one of the past papers solution, the examiner suggested an alternative way to calculate expected futures price is to use spot rates or forward rates.
Thanks.
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