Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › currency future (Q2 2011june)
 This topic has 10 replies, 3 voices, and was last updated 8 years ago by John Moffat.

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May 28, 2014 at 5:57 pm #171490jess
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why the answer did not calculate the gain and loss on future?
secondly, what rate to use for calculating the net payment/receipt(without considering the future market gain or loss here)? spot rate in x month time or the future price given?
if we use spot rate in x month time, what if the question does not give us the spot rate in x month time?May 28, 2014 at 6:15 pm #171494John MoffatKeymaster Topics: 57
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It is because he calculated the ‘lockin rate’ (the effective rate that will end up applying if we use futures, taking into account the change in the basis).
It is because we are not given the spot rate in x months time, that instead he has calculated what the net affect will be by working out the lockin rate.
May 28, 2014 at 6:23 pm #171501jess Topics: 36
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so actually we must use the spot rate in x mnth time, correct? if one question does not give the spot rate in x month time, then what rate should we use?
May 28, 2014 at 7:23 pm #171517John MoffatKeymaster Topics: 57
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Not correct – as per my previous answer.
If you are not given the spot rate in x months time then you have two choices:
either invent a spot rate in x months time and show what happens. (The net result of the transaction and the profit or loss on the futures will be the same whatever spot rate you invent)
or
alternatively calculate the lockin rate (which is what he did in this question and takes into account the basis risk) and this will give the net effect in x months time.May 28, 2014 at 8:11 pm #171531jess Topics: 36
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can u please show me the method one based on the info on this question(Q2 2011june)?
thanks!
May 29, 2014 at 8:06 pm #171750John MoffatKeymaster Topics: 57
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I am sorry but I really do not have the time to write up a whole exercise on this at the moment.
Just invent and exchange rate in x months time, calculate what the futures price will be in x months time (assuming as usual that the basis falls linearly to zero over the life of the future), and then calculate what happens converting the transaction at the spot in x months time, together with the profit/or loss on the futures.
You will find that the net result is the same whatever spot you assume in x months time.
(or try the example in my lecture with a different spot on the date of the transaction – you will fine you end up with the same net result.)
June 13, 2014 at 2:54 pm #176445julia888 Topics: 0
 Replies: 20
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Dear John,
Desperately need your help with a lockin rate, please…… It is not well covered in study texts and in the country where I’m currently living P4 courses unfortunately are not available, so I’m completely on self studies. You have mentioned above that the net result will be the same as if a lockin rate or invented future spot rate is used. I tried to figure it out and have some odd results.
TODAY
SPOT 1.3618
5 MONTHS FUTURES 1.3698
BASIS 0.0080
DAYS 150IN 4 MONTHS
BASIS 0.0016
DAYS 30
Example 1
IF SPOT 1.3675
FUTURES 1.3691 (1.3675+0.0016)
Example 2
IF SPOT 1.3690
FUTURES 1.3706 (1.3690+0.0016)Ex.1 and Ex.2 – are two invented rates and in the Ex.1 actually resulted in both underlying market and futures market resulting in loss, which is odd….
And if we take an invented spot rate from Ex.2:
result on underlying market
= $20m/1.3690 =14,609,203 €
result on futures market
=(117 contr. x €125,000 x (1.3706 1.3698))/1.3690 = 8,546 € gain
total receipt = 14,617,750 €if we estimate receipt at the lockin rate = $20m/1.3676 = 14,623,803 €
so the estimated receipt differs in both methods (If you have a chance to have a look at this, please, just give me a clue that was wrong in my calculations? can not stop thinking of it since the day of the exam. Many thanks in advance!
June 13, 2014 at 3:24 pm #176451John MoffatKeymaster Topics: 57
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The only think wrong is your lockin rate. I don’t know where you got 1.3676 from.
You can get it in two ways:
either it is the current spot (1.3618) plus the forecast change in the basis (0.0080 – 0.0016 = 0.0064). So a lock in rate of 1.3682
or you can take the current futures price (1.3698) less the forecast basis on the date of the transaction (0.0016). So again, a lock in rate of 1.3682.
(As to whether you plus or minus, it is whichever makes the lockin rate between the current spot and the current futures price).
So….using the lock in rate in your example gives $20M / 1.3682 = EUR 14,617,746.
(I think that we can put down the difference of EUR 4 to rounding 🙂 )
Hope that helps.
June 13, 2014 at 3:30 pm #176453John MoffatKeymaster Topics: 57
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PS I will explain why in your first example, both give a ‘loss’.
Remember that futures are used to fix the net amount on the date of the transaction. However, because of the basis, the net amount will not be the same as if we were to convert today (the net amount might end up a bit higher, or might end up a bit lower).
If you repeat your workings for your example 1, you will end up with exactly the same net result as for your example 2 (plus or minus a few Euros rounding).
The net result here is lower than it would be if we were converting today, but is fixed (subject to the assumption of the basis falling linearly).June 13, 2014 at 5:40 pm #176483julia888 Topics: 0
 Replies: 20
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Dear John,
Thank you so much for your kind reply! Of course, you are right! I focused completely on the second method that the examiner suggested for this question, but of course if we use SPOT +/ change in basis both methods (“lockin rate” and “classical“ method involving calculations of P&L on futures) result approximately the same receipt total.
The second prediction method the examiner has posted in his model answer to June 2011 Q2 was based on 2 months futures 1•3633 and 5 months futures 1•3698
1•3698 – (1/3 x (1•3698 – 1•3633)) = 1•3676I thought that this method is also called a “lockin rate” and the approach was so similar… (i.e. no P&L on futures was calculated, net expected receipt was found = US$20,000,000/1•3676 = €14,624,159). Probably as any prediction it also has some leeway and for this reason it resulted in different amount of euro receipt.
Ironically, in the exam my calculation on futures indeed ended up in loss on both underlying market and on futures market (based on invented rate of inflation 3% in Switzerland and =>9% in US) which confused me completely, considering much easier methods could have been used….
You shed the light now for me on this “lockin rate” method 🙂
Thank you so much for your explanation and also for your great lectures!!!June 13, 2014 at 6:01 pm #176488John MoffatKeymaster Topics: 57
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You are very welcome (and thank you for the comment) 🙂

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