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Predicted futures using spot rate = 1.1422 + ((1.1485 – 1.1422) × 1/7) = 1.1431
Why is it 1.1485 – 1.1422 , why not 1.1422-1.1485? Also pls tell how in months 1 and 7 came as i get confused in different questions?
When closing spot rate is not given, we have to choose current spot rate or can we go with forward rate also?
I assume you a referring to a past exam question, but you will have to tell me which exam – I cannot remember the name of every past question 🙂
What the examiner has described as the predicted futures price is actually the ‘lock-in’ rate.
We are using September futures which finish in 7 months time. The current basis is 1.1485 – 1.1422 (the difference between the current spot rate and the current futures price).
We finish the futures deal at the end of August, and which time there is 1 month left to maturity, and so the basis remaining will be 1/7 x the current basis (because we assume that the basis falls linearly to zero over the life of the future).
If we are not given the spot rate on the date of the transaction (you normally are not given it, and it is not given in this question) then you use the lock-in rate as above (and as I explain in my free lectures).
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