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From the workings it shows that we close out the futures agreement. This is different to how the futures were used to hedge in the lecture examples.
Can you advise on how I should know to close out the future as per the example or do it as you did in the lecture examples whereby the gain or loss on the futures was used?
Thanks
The answer uses the lock-in rate, which gives the net effect of converting the transaction at spot together with the gain or loss on the futures.
I explain about the lock-in rate in my lectures, and we have no choice but to use the lock-in rate here because we are not told the spot rate or the futures price at the date of the transaction.
Thanks for the reply.
Similarly in q1 of the March/June 2016 sample question to find out the amount of contracts we need they divided by the closing futures rate for may.
In you examples we worked out contracts by the closing futures price provided.
Can you advise as to what I am missing here?
Padraig
There are arguments for using either of the two rates, and in the exam either would be accepted when calculating the number of contracts.
(Obviously the final answer might be different, but there is rarely one correct answer for any of the AFM questions and so that does not matter – it is the workings that get the marks)
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