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April 18, 2020 at 6:13 pm
Hi sir! Your videos are really really amazing and it just keeps up my interest in learning the subject increasing day by day….. I have a doubt. Could u pls explain when do we exactly add or subtract the expired or unexpired basis?
August 14, 2019 at 8:43 pm
Hi, John! Could you answer please on the previous question? Many thanks!
Kind regards, Nick
John Moffat says
August 15, 2019 at 7:22 am
I will but I did not see it before – I can not view all questions posted here. That is why we have the Ask the Tutor Forum and questions there are always answered within 24 hours.
August 4, 2019 at 2:09 pm
Hello, John! Could you please explain what exactly is the contract amount for using the lock-in rate.
Applying to Example 11: 1) I’m not sure if the contract amount is our initial $500,000 OR the contract amount is amount of contract size (62,500) multiplied by 5 hedging contracts? 2) When i assume that $500,000 is a contract amount (which i’m not sure – see 1 above), and using lock-in rate of 1.4843 I get an answer of 336,859 pounds, which however does not reconciles to the answer we obtained in Example 11.
Could you please explain what are the reasons for this difference??
Thank you in advance! Nick
August 15, 2019 at 7:27 am
Although we wish to hedge $500,000, we cannot because the contract size is GBP62,500.
Therefore because we have to hedge in fixed sized contracts we are actually hedging 5 x 62,500 = GBP312,500.
The difference is an over or under hedge which is not hedged using futures (although we could use a forward rate on that amount, if forward rates are available).
April 15, 2020 at 4:36 pm
If contracted value is GBP 312500 , converting this into USD at current spot 12 September (312500*1.4791)= $462,218.75, that again converting it by lock in rate 1.4843 would be GBP 311,405.
please confirm is these numbers are correct or not,if not state correct one pls.
April 15, 2020 at 5:22 pm
Your figures are correct. In addition there is 500,000 – 462,219 = $37,781 that is not covered by the futures (an under hedge) and so this payment will have to be converted at the spot rate on 12 September (if forward rates were available then we could have used them on this under hedge).
April 15, 2020 at 6:13 pm
thanks a lot
June 4, 2019 at 1:10 pm
Hello John, the lock in rate is a far better and faster method of calculating future hedges. It also prevents being proned to mistakes of using wrong exchange rates. Pls can lock in rate be used in all exam questions?
June 4, 2019 at 3:27 pm
Yes – provided obviously that the question does not specifically ask you yo do different (which is unlikely 🙂 )
May 27, 2019 at 8:36 pm
Sir John, I wanted to ask that in the lecture notes the places for the advantages and disadvantage of futures forward rate contracts ,money market hedge etc are left blank . So can you please tell about them or are there any updated notes. ???
May 12, 2019 at 11:08 am
These lectures will save my life, really amazing.
March 9, 2019 at 3:10 pm
mjibola: If the current spot is lower than the current futures price, then the lock-in rate must be between the two and so it will be higher than the current spot and lower than the current futures price.
If, on the other hand, the current spot is higher than the current futures price, the the lock-in rate must be lower than the current spot and higher than the current futures price (to be between the two).
March 9, 2019 at 2:52 am
Ok. But why would it be incorrect to deduct the unexpired basis from the spot or add the expired basis to the future? After all, both results would still be in between the spot and future?
I’m not clear of that please
January 28, 2019 at 8:19 am
i have a question on how should candidate treat under-over hedging in an exam question. Say a contract size 5.39 rounding to 5 in previous Example 11 . Will student be expected to treat the remaining 0.39 under-hedging if the exam question did not ask?
0.39 contract under-hedge = £24,427 ($500,000 / 1.4840 ) – (£5 x 62,500)
Thank you for the lecture.
January 28, 2019 at 3:37 pm
If you have the time in the exam, then yes. However, it never carries more than 1 or 2 marks, and so if you are short of time just write that they could use forward contracts on the under/over hedge, without spending time on the calculations.
November 12, 2018 at 8:34 pm
John, Thank you very much for this lecture, this makes total sense to me now.
November 13, 2018 at 7:14 am
Thank you for your comment 🙂
November 10, 2018 at 2:45 pm
I can’t understand why we don’t add EXPIRED basis to the futures rate or deduct UNEXPIRED basis from the spot rate to arrive at the lock-in rate if the difference between two rates falls in 2 months time by 2/3 (on the transaction date).
It’s really crucial for me to understand. Thank you in advance!
November 15, 2018 at 2:08 pm
BTW, even the specimen exam (p.15) shows that LOCK-IN RATE = lower rate (no matter futures or spot) + EXPIRED basis OR higher rate – UNEXPIRED (no matter futures or spot) basis:
[Alternatively, can predict futures rate based on spot rate: 1·0635 + [(1·0659 – 1·0635) x 4/6] = 1·0651]
November 15, 2018 at 4:16 pm
Yes, of course it will say that for that question.
However, it depends on whether the current spot rate is higher or whether the current futures price is higher.
Appreciate that the the two rates get closer together (they will be the same on the expiry date of the future) and therefore the ‘lock-in rate’ must be between the two. You add or subtract accordingly.
October 30, 2018 at 7:13 pm
hiya could you please what is the contract amount in futures lock-in-rate? waiting for your explanation. with thnx
October 31, 2018 at 6:58 am
I explain this in the previous lectures.
The contract amount will be given in the question just as in the earlier examples. The lock-in rate is applied to the contract amount (multiplied by the number of contracts, again calculated as in the previous examples).
June 6, 2019 at 4:47 pm
so are you saying that when the lock in rate is applied to the contract amount and the number of contracts the value i get is the outcome of the hedge? i do not need to do any added computation?
June 6, 2019 at 4:53 pm
No extra computation is needed (except for hedging any under or over amount using forward contracts – although doing the calculation is more of a bonus mark, the main thing is to at least mention the possibility)
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