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Today: 31 JULY
A UK company expects some receipts and payments in € in 3 months’ time (31 OCTOBER)
We are given the spot rate £1 = €1.4537 – 1.4542
Price of December futures €1 = £0.6929 (equivalent to £1 = €1.4432)Nothing is given about the futures price or spot exchange rate on 31 October. It is simply mentioned that “when futures position are closed out the basis is zero”.
Based on the info given, the following can be ascertained:
Basis on 31 July = [(1.4537+1.4542)/2] – 1.4432 = 0.0108
Basis on 31 October = 0Is the lock-in rate calculated as the midmarket spot on 31 July of 1.4540 less the expired basis of 0.0108? When I do that, I find that the futures price on 31 July and 31 October is the same.
I will be grateful if someone could confirm if it is the correct approach to do this question.
Thanks
The lock-in rate on 31 October will be the same as the futures price on 31 July. This is not because the futures price on 31 October will equal the lock-in rate, but because the net effect of converting the transaction at spot together with the gain or loss on the futures will be the lock-in rate.
However, is this a past exam question (and if so, which one), because it is not realistic at all for the basis to be zero on 31 October 🙂
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