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- This topic has 11 replies, 6 voices, and was last updated 14 years ago by John Moffat.
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- May 19, 2010 at 2:00 pm #43987
Which contract I should choose to buy/sell currency on 1 st of March if I was given the option in Feb & May. Can you please also tell me the reason why so I can apply for other questions
May 20, 2010 at 9:13 am #60618AnonymousInactive- Topics: 0
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in currency future spot rate is 94(100-current libor 6) and we have opt for for 93.79..basis risk will be .21% and in future closed out price is 93.5(100-6.5 libor) less remaining basis risk .03=93.47%
gain at future market
sell (93.47-93.47)*40*500000*3/12=16000my question is this that if we sell currency future at 93.79 the remaining amount will be of interest payment 6.21% and we can buy at 93.47 the remaining amount will be of interest 6.53%…in selling we have 6.21% it means we will earn this interest and in buying we have 6.53% its means that we have to pay that much interest…so how can we have gain if we are paying more interest ……?
also tell that what basis risk means and on which factor it depends?
May 20, 2010 at 11:32 am #60619@lapthu said:
Which contract I should choose to buy/sell currency on 1 st of March if I was given the option in Feb & May. Can you please also tell me the reason why so I can apply for other questionsYou should choose a May option. Assuming it is american style then it can exercised at any time up to the last day of the relevant month. A February one would have to be exercised by 28 February but we want to exercise on 1 March.
May 20, 2010 at 11:38 am #60620@faizankhan111 said:
in currency future spot rate is 94(100-current libor 6) and we have opt for for 93.79..basis risk will be .21% and in future closed out price is 93.5(100-6.5 libor) less remaining basis risk .03=93.47%
gain at future market
sell (93.47-93.47)*40*500000*3/12=16000my question is this that if we sell currency future at 93.79 the remaining amount will be of interest payment 6.21% and we can buy at 93.47 the remaining amount will be of interest 6.53%…in selling we have 6.21% it means we will earn this interest and in buying we have 6.53% its means that we have to pay that much interest…so how can we have gain if we are paying more interest ……?
also tell that what basis risk means and on which factor it depends?
These are not currency futures – they are interest rate futures.
Although the prices of the futures change with interest rates, they are not interest rates. So when you buy and sell, the profit is the sell price less the buy price (divided by 400 as you say). They do not convert the futures prices into interest rates, so not think in terms of interest rates.
If the sell price is higher than the buy price then there is a profit. If the sell price is lower than the buy price then there is a loss.Futures and interest rates are two different things. The futures prices are actually based on government stocks, and will vary as interest rate vary, but because they are not the same thing, they will not be exactly the same.
So……although 6% interest rate is equivalent to a futures price of 94.00, the actual futures price will be a little bit different. Also, if the interest rate was to go up by (say 1%) then the futures price will fall, but not by exactly the same amount.It is because of this that dealing in futures will not be an exactly perfect hedge. The difference is what is called basis risk.
May 24, 2010 at 7:16 am #60621AnonymousInactive- Topics: 0
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thanks….
can u tel me on what factor basis risk depend and what it exactly means?
how business risk is calculated and how can all companies in same industries can have same business risk…as far as i know business risk include(operational, compliance,financial)…
how equity beta calculation is done…?May 24, 2010 at 8:37 pm #60622AnonymousInactive- Topics: 0
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i was given a whole bunch of figures when deal with options. can i know what does that mean and how am i suppose to choose the right figure to use in the case. honestly, i got no idea at all about options. many thanks.
May 30, 2010 at 3:26 pm #60623@faizankhan111 said:
thanks….can u tel me on what factor basis risk depend and what it exactly means?
how business risk is calculated and how can all companies in same industries can have same business risk…as far as i know business risk include(operational, compliance,financial)…
how equity beta calculation is done…?Basis risk is the fact that although the price of futures will change as interest rates (or foreign exchange rates – if you are taking about foreign exchange futures) change, they do not move precisely together. If they change by different amounts, then you will not be completely removing the risk.
The risk of a business is due to two types of factors – factors within the specific company (unsystematic risk) and factors due to the economy (e.g. the rate of inflation) (systematic risk).
Economic factors such as the rate of inflation will affect all companies in the same sector in a similar way – this is the risk that betas are measuring.
(The extra risk in each individual company is ignored because we assume investors are well-diversified and have therefore removed this risk by having lots of different shares).Equity betas are published. They are calculated from past movements using a correlation approach. However you will not be asked to calculate them in the exam.
(However one reason that shares are more risky (and therefore have higher equity betas) is due to gearing. You can be asked to remove the gearing effect from an equity beta, and also to calculate the equity beta if you know what the beta would be without gearing. For these you use the formula given in the exam)May 30, 2010 at 3:27 pm #60624@huilincheah said:
i was given a whole bunch of figures when deal with options. can i know what does that mean and how am i suppose to choose the right figure to use in the case. honestly, i got no idea at all about options. many thanks.It is impossible to teach everything about options on a forum.
Have you watched my lectures on futures and options on this website? They are free!!
June 1, 2010 at 4:15 pm #60625AnonymousInactive- Topics: 0
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i need some enlightenment over the examiners answer to question 1 part b in the december 2007 examination
to be specific i do not get the logic behind“However, given that 18 days of cost of sales is unfunded this implies
that (18/365 × (143·2 – 28·0)) = $5·68 million of extra capital would be required to finance the working capital cycle
reducing the dividend capacity to $24m – $5·68m = $18·32 million.”please respond as soon as possible i will be highly thankful.
regards
pixelJune 3, 2010 at 11:47 am #60626His answers are very confusing, but what he is saying is that at the end of 2008, the receivables days are 32 days (25.6/288.1 x 365), that the inventory days are 8 days (3.2/143.2 x 365), and that payables days are 22 days (8.8/143.2 x 365).
So the working capital cycle is 32 + 8 – 22 = 18 days. This means that the finance for these 18 days needs to be found.
June 5, 2010 at 12:35 pm #60627Why there is need in additional finance of working capital? The company in question has enough cash to pay off all its liabilites immediately. I just cannot get it right.
June 6, 2010 at 9:42 am #60628Although the company has plenty of cash brought forward, they should not distribute as dividend more than they are actually generating during the year. From the cash flow statement it is clear that if they distribute 28, then the cash balance will fall by 4.
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