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Dear Sir John, I am getting confuse , how to calculate futures price ( Q 2-Dec-2018 Nutourne Co). It is calculate based on unexpired basis or expired basis. I watched your lecture about currency futures also. Still not clear about the calculation. Please clarify it. Thanks
We do not know what the spot rate will be on 31 May (in 6 months time) and so we cannot calculate what the price of June futures will be on that date. Therefore we need to calculate the lock-in rate – i.e. the net effect of converted at spot together with any gain or loss on the futures.
The examiners answer calculates the lock in rate in two different ways – either of which is acceptable.
The first way he does it is to apportion between the price of March futures (which expire in 4 months time) and the price of June futures (which expire in 7 months time) to get a value in 6 months time. Because we want a rate in 6 months time, he takes the rate in 4 months time and adds on for another 2 months by taking 2/3 of the difference between the March and June prices. This gives 1.0361.
The second way he does is (and strictly the correct way) is to take the spot rate and add on 6/7 of the current basis (the difference between the current June futures price and the current spot rate. This gives a lock-in rate of 1.0358.
(You would get exactly the same answer by taking the current futures price and subtracting 1/7 of the current basis)Either answer is accepted – the second approach is strictly more correct and is the approach that I explain in my lectures.
Thank you sir for your clarification. As you said , Spot rate + 6/7 of the current basis. Is it expired basis method? Another way , current future price – 1/7 of the current basis. Is it unexpired basis method? May i write or wrong sir. Once again thank you Sir.
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