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Calculating effective future rates

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Calculating effective future rates

  • This topic has 1 reply, 2 voices, and was last updated 4 years ago by John Moffat.
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  • September 5, 2020 at 7:06 am #583521
    Kanikamittal
    Member
    • Topics: 1
    • Replies: 0
    • ☆

    Generally the future rate for the transaction date is calculated by adding or subtracting unexpired basis from the spot rate on that day. Or it can be calculated by adjusting opening futures.
    There are many cases where the future rate is also calculated by using spot rate adjusted with unexpired basis.
    But in one question CMC related to 2018 specimen the future rate is calculated by adding expired basis to the spot rate.
    My question is can future rate is calculated by adding expired basis to the spot rate? And if yes, why

    September 5, 2020 at 10:05 am #583550
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54701
    • ☆☆☆☆☆

    If we know the spot rate on the date of the transaction then we get the futures price on that day by adjusting by the unexpired basis. However in more exam questions we are not given the spot rate on the date of the transaction and therefore have to use the lock-in rate instead, which gives the net effect of converting the transaction and spot together with the gain or loss on the futures.

    To arrive at the lock-in rate we either adjust the current spot rate by the expired basis, or adjust the current futures price by the unexpired basis. I explain this in my free lectures and this is what has been done in CMC.

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