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Hi John ,
Please see export from an ACCA technical Article, i would like some assistance on how ACCA arrived at a spot rate on 26th aug of $1.65770
Snip from Article:
Scenario
Imagine it is 10 July. A UK company has a US$6.65m invoice to pay on 26 August. They are concerned that exchange rate fluctuations could increase the £ cost and, hence, seek to effectively fix the £ cost using exchange traded futures. The current spot rate is $1.71110/£1.Research shows that £/$ futures, where the contract size is denominated in £, are available on the CME Europe exchange at the following prices:
September expiry – 1.71035
December expiry – 1.70865The contract size is £100,000 and the futures are quoted in US$ per £1.
Summary
The company will sell 39 September futures at $1.71035/£1.Outcome on 26 August:
On 26 August the following was true:
Spot rate – $1.65770/£1
September futures price – $1.65750/£1That first example is just to illustrate how futures are used.
The question should have made it clear that the spot rate (and future price) on 26 August have been ‘invented’ just to show how things work. You cannot ever calculate what the spot rate will be on the date of the transaction because the whole problem is that it is uncertain and that is why we are hedging in the first place.That is why we calculate the ‘lock-in rate’ as I explain in my free lectures on foreign exchange risk management. The lock-in rate gives the net effect of converting at whatever the spot actually turns out to be together with any gain or loss on the futures.
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