Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › 1st Question from March 2016 exam session
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John Moffat.
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- May 16, 2016 at 4:41 pm #315346
Good day,
In march 2016 exam in Question 1 there was a question on calculating and chosing the best hedging strategy out of forward rate hedge, currency futures and currency options. The question is for currency futures and currency options only.The following example is not from the exam but demonstrates an idea of what was given:
It is 20 June 2004.
S plc owes an American supplier $500,000 payable on 12 September.
Spot rate on 20 June $/GBP 1.4821 – 1.4896
Futures price on 20 June:
June – 1.4800
September – 1.4840
December – 1.4860There were no spot rate and futures rate given on 12 September to estimate a futures price on 12 September.
For currency options there were given reverse prices expressed in second currency (GBPs) on 20 June, while spot rates are given in $ terms.
My questions are the following:
1) How to approach with the estimation of futures price, if neither spot price nor futures price is given on 12 Sep;
2) How to deal with options, if their prices expressed in a reverse currency? Shall we use cross rates to translate them for consistency purposes?I lost many marks on this task. Would appreciate for a quick response and sample ways of calculation of this kind of questions, or for a reference to similar questions in past exam papers, if any.
Thank you.May 16, 2016 at 9:57 pm #3153751. On what you have written you need to calculate the lock-in rate. If you watch my free lecture I explain what it is and how it is calculated.
2. Again, from what you have written you would just need to ‘reverse’ the quote by taking the reciprocal.
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