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Hi,
1) Are future rates always lower than the mid-point spot rate?
2) or do you work out the movement as of today between the mid point spot and futures and depending on which one is greater or lower do you use the same + or – when working out the forward rate at the transaction date?Hope you understand what i mean.
Thanks
1. No
2. Yes – whichever is the lower now will always be the lower (and vice versa) 🙂Between using the spot mid market rate and lock in rate on the day we’re finishing the deal, which would be more appropriate?
Or is it okay to assume a figure (p4 has so many assumptions anyway) and move on?.. these things are quiet confusing
You would never use the spot rate on its own – it would be spot rate on the transaction together with the gain or loss on the futures.
As to whether you do this or use the lock-in rate depends on the information in the question (although they would both give the same result). You are less likely to know the spot rate on the date of the transaction and so most likely you will have to use the lock-in rate.
Just appreciate that most of the marks are for proving that you understand how futures work, so make sure your workings are clear and do not get too worried if something goes wrong with the numbers 🙂
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