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I’m using the slightly older BPP kit (up to June 2017). The section B question 2 of the first mock exam (Retilon Plc) has me slightly confused in terms of calculating the basis.
For the 2 month euro payment they’ve calculated the basis at the end of April as the June Future price – forward rate for 2 months).
Whereas for the 3 month euro payment they’ve calculated the basis at the end of April as Sept Future price – Current spot rate.
So I was just confused as to why one is using the current spot rate and one the forward rate? As if the current spot rate has been used for the 2 month euro payment instead of 2 month forward rate the basis would have been bigger?
Thanks,
AlexIt is a mistake – they should have used the current spot rate in both calculations. 🙁
Hi, can you explain to me what does it meant by basis risk may be assumed to be zero at the time the contracts are closed out.
does this relate to the answer for 2 months time futures where the basis is 0 for end of june?
If (for example) they are June futures, then at the end of June the spot rate and the futures price will be the same (the difference (i.e. the basis) being zero).
I do suggest that you watch my free lectures on foreign exchange risk management where I explain this in detail.
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