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Chapter 18 Example 9

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Chapter 18 Example 9

  • This topic has 1 reply, 2 voices, and was last updated 8 years ago by John Moffat.
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  • Author
    Posts
  • June 1, 2017 at 10:24 am #389420
    petjumpjump
    Member
    • Topics: 12
    • Replies: 5
    • ☆

    Sir, I have problem assessing the video site to watch the lecture about Chapter 18 and therefore I refer to BPP textbook for calculation method of Chapter 18 Example 9.
    Using the BPP method:
    1. type of contract-buy sterling futures which expires on 31 dec 2004
    $1,200,000/1.5045=sterling 797,607
    sterling 797,607/62500=12.76 (round to 13 contracts)

    2. Futures price 1.5120
    current spot rate (1.5045)
    Basis 0.0075
    from 12 NOV 2004 to 31 DEC 2004 there is still 2 months to go and average change per month should be 0.0075*2/4=0.00375

    3. the estimated futures price on 12 nov 2004 should be (sell sterling futures on that day therefore use the rate of 1.5190) 1.5190+0.00375=1.52275

    4. opening futures cost 1.5120 BUY
    closing futures eanings (1.52275) SELL
    futures profit 0.01075

    5. futures market profit: 0.01075*62500*13=8734.375

    6. on 12 nov 2004 $1200000/1.5190=sterling 789993 (receipt)

    7. total receipt: 789993+8734=798727

    compare to the answer there is quite a difference between the results of the futures market profit and I think about it over and over again and just couldn’t get why.
    Could you help me out of this and hint me on where I was wrong?

    Thank you so much.

    June 1, 2017 at 4:22 pm #389487
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54674
    • ☆☆☆☆☆

    In example 9 in the lecture notes, the spot rate on the date of the transaction and the futures price on that date are both given. Therefore you do are not required to estimate the futures price by using the basis.

    It is only after example 9 that I explain about the basis and how we can use this to estimate the futures price (as you have been doing in your answer).

    Almost certainly in the exam you will have to estimate the futures price as you are doing (or, more likely these days, you will need to calculate the lock-in rate) but do check – if the futures price is given to you then obviously you use what is given.

    I am sorry that you cannot watch the lectures. If they are blocked in your country, then ask on the support page because there are ways round it 🙂

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