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Dear Sir, I have attended all your lectures and it was great, thanks for your guidance.
I have a doubt on the computation of futures contract outcome. Some of the past year answer shows a way different from the lecture. Eg for the accca March/June sample question, Averane Group, the answer of futures contract outcome was computed by just dividing the amount to receive $6.45m by the lock-in rates (the predicted futures price). I’m confuse as according to the lecture, we will divide by spot rate and find out the profit from the deals of futures. Besides, there is an issue on the same question as well, the number of futures contract was computed by dividing the lock in rate instead of the exercise future price. I have reread the question few times but still can’t see a clue on such method. Much appreciate if you could help on this. Thank you.
I do explain lock-in rates in my lectures.
If we know the spot rate on the date of the transaction we are then able to calculate the futures price on that date. In that case the transaction is converted at the spot rate and there is a gain or loss on the futures.
However, these days it is rare to be told either the spot rate or the futures price on the date of the transaction and in that case we have no choice but to use the lock-in rate.
Converting at the lock-in rate gives the net effect of converting the transaction at spot together with the gain or loss on the futures (the examiner is wrong to call it the ‘expected futures price’).
As far as calculating the number of contracts is concerned, there are arguments for using either of the two rates. Usually it makes no difference to the number of contracts anyway, but if it does then you still get the marks either way (obviously the final answer is a little different, but the final answer does not count for anything anyway 🙂 ). The examiner prefers to use the lock-in rate for calculating the number of contracts, so to make it easier for the marker (and therefore safer) best is to use that rate.
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