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Sir in the futures part of this question, they have not taken care of dates.
According to me they should have taken the basis at 20 April first- which comes to 0.0014, then they should have taken for 2 months later which is 20 June( unexpired basis of 0.0002) and then closed at 30 June. (total days were 71 and unexpired was 10/71*0.0014)
My lockup rate is coming to:
0.0002+0.6964=0.6966
which i have multiplied by 393265.Have i done it wrong?
Thankyou
It is because part (a)(i) of the question says to assume that the basis risk is zero at the time the contracts are closed out. Otherwise what you have done would be correct.
(Incidentally, it is the lock-in rate (not the lock-up rate) 🙂 )
thankyou!!
So what I understand is that we generally assume June futures would expire at 30 June and that is when the basis risk would be zero. However in this case we are assuming basis risk to be zero at 20 June as this is when we close in. Is that correct?
Oh, and one more thing please.At the end of April they have taken the spot to be at (1/1.439)- Is that an assumption? Because we have not been given the exchange rate for 5 months time? If there was a forward rate for 5 months we would have used that instead?
Sir I am feeling they have adopted a different technique. That is they have taken 20 April as end of April and 20 July as end of July. They have ignored the 10 days to the month end?
We do normally assume that the basis risk is zero at the end of the future – 30 June, but this question specifically says to assume that it is zero when the contract is closed out.
Although the answer has headed up the workings ‘end of April’ it actually should be headed up 20 April and they have used the spot rate at 20 April which is correct.
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