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Hi,
I am confused on currency futures. I understand that if a company buys (or sells) a currency future, then it needs to sells (or buys) the currency future because the company does not need to pay anything in the beginning.
However, I am attempting to do 2016 Mar/Jun Q1 pass paper, to calculate the receipt of future contract.
Today: 1 March 2016
Receipt: €20M in 1 June 2016Currency futures (contract size $125,000):
March: €0.8638/$1
June: €0.8656/$1Answer:
Buy June futures
Futures on 1 June 2016: €0.8650/$1
Expected receipt = €20/0.8650 = $23,255,814I wonder why the answer does not need to sell June futures at the end, and calculate the difference between the rate of buy and sell?
Thank you.
The answer is using the ‘lock-in’ rate (which is the net effect of converting the transaction at spot together with the gain or loss on the futures).
I explain the lock-in rate (and how to calculate it) in my free lectures on foreign exchange risk management, and most questions these days need you to calculate the lock-in rate (because we do not know the spot or the futures price at the date of the transaction).
Is it correct for below statements?
If question provides June futures price at the date of the transaction, it is the selling price of future. Then, the answer needs to calculate the profit / loss by the difference of buying price and selling price on June futures.
However, the question does not provide the futures price at the date of the transaction, we need to calculate the lock-in rate, and the rate includes the profit / loss from the future. Therefore, the rate x no. of contract = net receipt.
If the question provides:
(1) Future price now & the date of the transaction -> Sell & Buy / Buy & Sell -> Profit / loss = Difference x no. of contract
(2) Future price now only -> Lock-in rate -> Net receiptThank you for your reply.
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