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Firstly, thanks for all your help, and OpenTuition too!
In your lectures we are taught to use the current mid-market spot and the current futures price, and that the difference between the two will fall linearly to zero over the lifetime of the future.
Yet in question 2 of the 2018 December AFM exam the futures price (at the time of the transaction) is calculated using two thirds of the expired basis between the March and June futures prices – the mid market spot (from 6 months earlier) doesn’t come into it!
When is it right to calculate the unexpired basis between spot and futures prices, and when is it right to calculate a point between two consecutive futures prices? Or are both methods right?
Thanks, Brian
Because we do not know either the spot rate or the futures price at the date of the transaction, we have to use the ‘lock-in rate’.
You can get it in two ways (and the examiners answer shows both ways). One way is the way I show in my lectures (taking the current spot rate and adjusting by the expired basis, or taking the current futures price and adjusting by the unexpired basis).
The other way (provided that more than 1 current futures price is given, is to apportion between them. Here we need an effective futures price for the end of May, so apportion between the prices for March and for June futures.
Thanks John, but in the alternative calculation, interestingly the examiner uses the spot ‘buy’ rate of 1.0292 and not the mid-market spot which would be 1.0301
Why is that, and does it matter?
Many thanks, Brian
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