Hi, for calculation of basis, if I interpret it as follows:
"For interest rates,
Current price - futures price = basis.
For exchange rates or foreign exchange-related transactions,
Futures price - current price = basis"
Please may I know whether my interpretation above is correct? Thank you.
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Calculation of basis (hedging)
4y ago#1The basis is the difference between the two in both cases. Which one you subtract from the other is irrelevant.
Have you actually watched my free lectures?
Yeah.. but in Q.38 Adverane (BPP), the opening basis is calculated as 1.1204 (future) - 1.1222 (spot) = - 0.0018. Then, the unexpired basis is - 0.0018 x 2/6 = - 0.0006. The effective futures rate is therefore 1.1204 (opening future) - (-0.0006)...
Please may I know why there is a negative figure for unexpired basis? Thank you.
4y ago#3It doesn't matter about the sign.
The lock in rate is always between the current spot rate and the futures price and so you add or subtract so as to ensure it is between the two.
I see. Now I understand. Thank you!
4y ago#5You are welcome.
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