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Hi Prof Moffat,
Just finished attempting a question in the Kaplan Kit (Polytot Plc). My question has to do with estimating the futures price. Aside using the lock in rate, it is okay to take the average of the spot and use as the current spot and also use the average of a four month forward rate as the future spot (Spot on day of completing the futures deal)
Current spot $/£ 1.5475 – 1.5510 ….Average 1.5493
Four month forward $/£1.5337 – 1.5374….Average 1.53561 July 1 November 31 Dec
Futures 1.5275 1.5283
Spot 1.5493 1.5356Diff. (0.0218) (0.0073) 0
so buy futures at 1.5275 and sell at 1.5283. Is this approach credible please.
Many Thanks
Carlos
It isn’t as good, but it would get you most of the marks. (The marks are much more for showing an understanding of why and how we use a futures deal, rather than for the exact figures 🙂 )
Ok. Thanks. So in this case I can state any assumptions made and also state whether i’m using the futures to protect the exchange rate from going against our favour and making some profit to offset against any loss we might incur on the original transaction left at risk……..yes yes?
Hi again.
I’m a little bit stuck on Dec 14 (Keshi Co) Interest rate option question. I’m particularly lost on the 5th paragraph, talking about option price quoted in basis points at 100 minus the annual % yield and settlement…..
How do we get the current futures quote with that information please.
Many Thanks
Carlos
He is referring to the strike prices.
Since the options are options to buy or sell futures, the strike prices are quoted in the same way as futures prices – i.e. 100 – interest (so interest of 4%, for example, is equivalent to a futures price of 96.00 (100 – 4).The current futures price has nothing to do with the option strike price.
It will help you to watch my free lectures on interest rate futures and interest rate options.
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