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Hi John.
I am sorry to ask so many questions recently, I will try and keep it down.
I have just finished the lecture on ‘lock-in rates’. I understand how to calculate it, but i am confused about what it is for? (i did ‘google search’ for further clarity before asking here, but am still confused):
here is the impression that I have:
if we lock in that rate, it is the same as paying at spot, today.
-hence so we avoid unforeseen volatility problems (we now know what profit/loss we will have in the future).
so after calculating the lock in rate, we ask the bank to buy/sell us a future at this rate of exchange?
is the above correct?
No. The way futures work is as I go through in the first lectures on futures.
We convert the transaction at whatever the spot rate it on the date of the transaction. We also close of the futures deal on the same date, and the gain or loss on the futures ‘cancels’ out the loss or gain on the spot rate.
The problem is that as of ‘now’ we do not know what will happen to the spot rate or to the futures price.
What the lock-in rate is doing is calculating what the net effect will be at the date of the transaction, regardless of what happens to the spot rate and the futures price.
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