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Foreign exchange risk management (1) Part 7 – ACCA (AFM) lectures

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Comments

  1. Farhaan says

    March 28, 2025 at 1:17 am

    Dear sir,
    By the definition given in the notes the definition of futures say that it is “a binding contract to buy/sell contract currency at a fixed rate and at a fixed date” but the assumption given for estimating futures prices states that the price of the futures will be same as the spot rate at the end of its life

    Sir I had initially thought that the Price on the date of purchase of the futures contract would be the exercise price at the end of its life because of the definition, now I have understood that the price we purchase futures at is the market price and not the exercise price and the Market value of the future is assumed to be equal to the spot rate on the last day (on maturity)

    So does that mean the Market value of the futures on the last day is also the exercise price?

    Also, I still do not understand why in the definition of futures it is stated that Currency futures contract is a contract to buy/sell at a “Fixed price” because isn’t the price variable as its based on the spot rate on maturity, so can you pls clarify on what this fixed price is?

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    • John Moffat says

      March 28, 2025 at 8:37 am

      If you want to convert currency on a specific date then you convert it at whatever the sport rate is on that date (and that is the exercise price). However if the conversion is going to take place on a future date then obviously by that date in the future the spot rate may have changed and therefore the amount you will pay or receive on conversion will change – so there is risk.

      To avoid that risk you can use futures which effectively fix the exchange rate today that will apply on the future date.

      So, for example, the futures rate today that will apply to converting on (say) 30 September might be 1.20. If you enter the futures contract then the transaction on 30 September will be converted at 1.20 whatever the spot rate happens to be on 30 September.

      However, if you wait a week then the futures rate offered for conversion on 30 September will likely be different. The futures rate will change from day to day.

      If you waited until 30 September to enter into the futures contract then you will be getting a fixed rate for converting on 30 September. That fixed rate on 30 September must be the same as the spot rate on 30 September otherwise it would be ridiculous – nobody is ever going to give you a rate on 30 September for conversion on the 30 September that is different from the spot rate on 30 September 馃檪

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      • Farhaan says

        March 28, 2025 at 4:00 pm

        Thank you sir, I have understood now.

      • John Moffat says

        March 29, 2025 at 10:15 am

        Great 馃檪

  2. Emizana says

    November 22, 2024 at 12:20 am

    Hi, why are we using the average spot rates when calculating basis risk instead 1,4821 and 1,4791 on 20 June and 12 September, respectively?
    Thanks

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  3. AnnaSakhro says

    October 7, 2024 at 10:20 am

    Great lecture. Thanks a lot, John

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    • John Moffat says

      October 8, 2024 at 11:46 am

      Thank you for your comment 馃檪

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  4. Akash2411 says

    August 10, 2024 at 12:35 pm

    Hi John, Thanks for this amazing lecture. Just a quick question, at time stamp 23:36, for calculating the number of days, it should be 10 days in June + 31 in July + 31 in Aug and 30 days in Sep, should it not?

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    • Akash2411 says

      August 11, 2024 at 3:31 am

      Please ignore. I actually paused the lecture to think it through. You’ve corrected in the next two mins. Thank you 馃檪

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  5. adnanhustle says

    May 23, 2024 at 1:34 pm

    hey, sir thank you for this amazing lecture.
    Sir, what will be the examiner’s response be if in example 11, we sell 6 contracts instead of 5 contracts?

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    • John Moffat says

      May 23, 2024 at 3:31 pm

      You will get the marks whichever way you round it 馃檪

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  6. Gian97 says

    January 22, 2024 at 8:08 pm

    Hi, I’m not sure why the basis risk is only 0.0067 at August 31 st in example 10. Don’t you have 3 periods for the futures (July 30, August 31, September 30)? If the spread starts at 0.02 at July 1, the spread will reduce by 0.0067, 0.0067 *2, and 0.0067 * 3 at July 30, August 31, and September 30 respectively. Which means that at August 31, the spread (basis risk) would be “reducing” the spot rate by 0.02/3*2 or 0.0134 to close the gap with the futures rate?

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    • no1lover says

      January 24, 2024 at 11:02 am

      Remember the as we are assuming the difference between the spot and the futures falls linearly to zero the keeps reducing by .0067. Therefore by 31st Jul the Remaining Basis will be 0.0133 and by the 31 Aug it would be 0.0067. Hence why now you can use the remaining basis of 0.0067 to calculate the futures price.

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  7. i.dislike.tax says

    September 1, 2023 at 12:35 am

    Hello John.

    Why is it that on the date of the transaction we divide by the lower rate, i.e., 1.4791 to convert to spot, but then while calculating the profit, we divide by 1.4812?

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    • John Moffat says

      September 1, 2023 at 4:01 pm

      To pay the supplier we are buying $’s and so convert at 1.4791.

      We are receiving a $ gain on the futures therefore we need to sell $’s and so convert at 1.4812.

      (What they could do is use the $ gain on the futures to part pay the $500,000 and so only the net $ amount would need to be converted at 1.4791). Either is acceptable in the exam.

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      • guyver101 says

        January 5, 2024 at 6:18 am

        Hi John, as I was watching example 11 , this was my thought too.

        Presumably in real life this is the better option as you save (by avoidance) twice on the spread ie the $1281.25 to GBP for the hedge, and the reduction of GBP required as now we need (500000-1281.25) $498,718.75?

        thanks

  8. jacinththomasjohn@gmail.com says

    June 2, 2023 at 3:33 pm

    that was amazing, just one doubt , at the end while we convert the profit to pounds should we use the buy rate ie the smaller rate or sell ie the higher rate ? , as in this case we need to pay dollars hence buy dollars and sell pounds so shouldn’t we be using the buy rate for that conversion?

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    • John Moffat says

      June 3, 2023 at 6:57 am

      The profit is calculated in dollars and so to convert it to pounds we need to sell dollars and buy pounds.

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  9. kasobi says

    March 9, 2023 at 4:48 pm

    I’m so much enjoying the lecture. Thanks John

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    • John Moffat says

      March 10, 2023 at 8:26 am

      Thank you for your comment 馃檪

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  10. Joseph says

    March 5, 2023 at 12:55 pm

    What a great lecture! Thanks John

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    • John Moffat says

      March 5, 2023 at 4:05 pm

      Thank you for your comment 馃檪

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  11. abokor says

    October 20, 2022 at 1:00 pm

    Thanks to you, AFM finally makes sense to me.

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    • John Moffat says

      October 20, 2022 at 4:05 pm

      Great 馃檪

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