- This topic has 5 replies, 2 voices, and was last updated 4 years ago by
.
- Posts
Sir I applied what Ive asked here: https://opentuition.com/topic/calculating-future-spot-price-for-options/ to your classroom example and it didnt match:
Today is 1st April, We receive money in 1st August.
Current Rate on 1st April is 1.5
September futures rate is 1.47Therefore remaining basis = 2/6*0.03 = 0.01
Now, we dont know transaction date futures price; so, applying what I’ve asked:
Current spot rate – remaining basis = transaction date future rate
which is:
1.47-0.01 = 1.46Negative 0.01 because we are following the trend of futures price being lower than spot price
Therefore:
Transaction date spot price:1.47
Transaction date futures price:1.46But in classroom, youve gotten 1.48 as transaction date futures price, but above you said what I did is correct. Idk what to do now, im very confused could you help?
No – that was not what I wrote.
What you are calculating is the lock-in rate (which is the net effect of converting the transaction at spot together with any gain or loss on the futures)
I wrote that because the spot and futures prices get closer, whichever is the higher now will always be the higher.To get the lock-in rate you either adjust the current futures price by the unexpired basis (0.01), or you adjust the current spot rate by the expired basis (0.02).
So the lock-in rate (which must be between 1.5 and 1.47) can be calculated as either:
1.47 + 0.01 = 1.48
or
1.50 – 0.02 = 1.48
This is the lock-in rate, not the futures price on the 1st August.
The futures price on the 1st August will indeed by 1.46. The spot rate has fallen and so to will the futures price, but the difference between them will be smaller.
“So the lock-in rate (which must be between 1.5 and 1.47) can be calculated as either:
1.47 + 0.01 = 1.48
or
1.50 – 0.02 = 1.48”
Sir this is in the case the spot rate is higher than the current future rate.
Will the + and – be the opposite in the case the spot rate is lower than the current future rate
- The topic ‘Calculating Future Spot Price for Futures’ is closed to new replies.