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  3. Sorry i am a bit confused lets suppose we are not given the spot rate or futures rate on the transaction date. I know we will need to use the lock in rate but how will this work if there are contract sizes given in the question? Thanks

  4. If the information is available, should I calculate the answer the long winded way? Only, for the CMC Co question, June 2014, I got the correct answer for the furtures question using a lock in rate. However, in the answer they did it the long way. Would I still get all the available marks it I used a short cut method?

    Thanks.

  5. Hi,

    Would I be correct in saying that, we only use forwards in conjunction with futures if we underhedge the furure transaction, in order to reduce the remaining bit of the transaction left at risk? But no need to use any forwards if we have overhedged the furure?

    Many thanks.

  6. When you were calculating futures, why did you divide the dollars by the spot rate on 1st April, rather than the future rate at the first of April? And the rule for lock in rate is that we will always deduct the difference of basis from the spot rate right?

    • There are arguments for using both – the spot rate or the futures rate. The difference will not make much difference and either will be allowed in the exam.

      As to whether to deduct or add the difference in the basis to the spot – it is whichever makes the futures price and spot rate closer together.

  7. Hi Sir, I have a small doubt about the concept of the Lock In Rate. Isn’t the Lock In Rate affected to a small extent by the future spot rate? Seeing that the gain loss on the futures transaction needs to be converted back to GBP, the spot rate in the future will thus affect the gain/loss in our home currency.

    So to that extent, is the Lock In Rate not exactly fixed, but a very close approximation to our net rate at the end of the day?

  9. Hi John,

    What is the actually the rule for adding/subtracting the basis to the spot if we’re doing it by the first method or the future price if we’re doing it by the second method?

    Thanks.

    • The futures price and the spot rate will move closer together, so the lock-in rate will be between the current spot and the current futures price.

      You add or subtract in whichever way gives a lock-in rate between the two.

      • Hi John, thanks a lot for a lecture. Im trying to figure out what Lock in rate and original amount to apply for example 11. I calculated Lock in rate of 1,4843. But when I apply it to the contract amoun- 62500 * 5 * 1,484. I get a strange result of 312 437, which is definitely not the outcome of the hedge…could You please shed a bit more light here? Thank You!

      • You should apply it to the amount of the transaction.

        Therefore $500,000/1.4843 = 336859

        The difference between this and the net amount in the answer to the example is because the contract size means we are not able to hedge the exact amount.

  12. Dear Teacher,

    I had three issues as below that need you help me more clearly:

    1. in previous lectures on future, The basis risk is the difference between future price and spot rate. However, in this lecutre i saw you shown them in positive sign (0.03 & 0.01) while future price wa less than spot rate. what I meant that why didn’t they were -0.03 and -0.01

    2. for the first way of calculation of Lock-in rate, you took spot (1.50) minus change in basis risk (0.02) to get lock-in rate $/GBP 1.48 because of spot rate greater than future price. If spot rate smaller than future price, we will take spot rate(1.50) plus change in basis risk (0.02) to get lock-in rate (1.52). Am i correct and is it a rule for calculation?

    3. for the second way of calculation of Lock-in rate, you took future price (1.47) plus basis risk on date of transaction (0.01) to get lock-in rate $/GBP 1.48 because of future price smaller than spot rate. If spot rate smaller than future price, we will take future pric(1.47) minus basis risk on date of transaction (0.01) to get lock-in rate (1.46). Am i correct and is it a rule for calculation?

    Could you please give me an explanation

    Thank you Sir

    • The answer to all three questions is that the spot and futures prices will get closer together over time.
      So if the current spot is higher than the current futures price, then the lock-in rate will be lower than the current spot. If the current spot is lower than the current futures price, then the lock-in rate will be higher than the current spot (which means that you are correct in point (2) 馃檪 )

  14. I was studying the exam question “Polytot”, with an answer given that calculated the unhedged amount using an exchange based on the lock-in rate, and I spent two hours of fruitless Google hunting trying to figure out what was going on.

    But your video explains it perfectly. Thank you!

  16. Dear John, what is the correct anwer? Is it total receipt of 675796 GBP=657894+17902?
    “Lock-in-rate” would be also something like 1M/675796=1.4797 – something like effective rate we have experienced after combining all outcomes from transaction and futures deal?
    Also how do you think if there might be a situation where examiner will ask us to use LOck-in rate for our calculation or is it just a one of the methods to come to final answer?
    Thanks for advise.
    With kind regards,
    Olga

    • What you say at first is correct.

      As to when to use it, it depends what information is given. If you are given a spot rate to use at the date of the transaction then you do it the way in the earlier lectures (calculating what futures price will be on the date of the transaction).

      If you are not told a spot rate to use at the date of the transaction (which these days is a bit more likely) then you should use the lock-in rate.

      Whatever you do, make sure you write down what you are doing. Most of the marks are for proving that you understand how futures work rather than for the precise figures.

  17. Hi John, your lectures are greatly appreciated!! 馃檪 So far everything has been very well explained, however, I was a bit confused as to why we divide $ 1 mn by 1.5 (spot rate on 1st April) instead of 1.47 (futures price on 1st April) in calculating the profit/loss on futures. Since we have always converted the $ amount to Sterling using the futures price in the previous examples.
    Hope you can explain a little more on that. Thank you again Sir 馃檪

    • But I do not use the spot rate on 1 April to calculate the profit/loss on futures!

      The profit/loss on futures is the difference between todays futures price and the futures price on the day that we complete the deal.

      • But Sir, what I meant is why profit = 1mn/1.5*(1.51-1.47) ?
        In previous futures examples we took the number of contracts by ($ amount/current futures price)/Contract size. And the profit/loss on futures we calculated by No. of contracts*contract size*difference in futures price. So why don’t we take the profit here by 1mn/1.47*(1.51-1.47)?

    • In future please ask this sort of question in the Ask the Tutor Forum rather than as a comment on a lecture.

      If you really mean revise (i.e. you have already studied everything and just need to remind yourself) then you need to work through as many questions as you can – preferably using a Revision Kit from one of the approved publishers, but certainly the last 8 real exams (which were all set by the current examiner).
      Also, you might find it useful to watch the lectures where I go through Question 1 of the last two exams.

      If you have not already studied, then you are going to have to move fast. Watch all of the lectures (with the lecture notes in front of you). Go back to relevant F9 lectures if there is anything that you have forgotten or were not happy about. When you have done this, then what I have written in the previous paragraph 馃檪

    • First you do not have to use a forward contract on the remainder. However it is a sensible recommendation and it is the difference between the contracted amount (on the futures) and the actual amount.

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