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Good Afternoon,
I’m having some problems with this question.
This is what I did to determine the unexpired basis on the transaction date and thus calculate a lock-in rate to get the financial result.
Nov 30, 20X8 May 31, 20X9 June 30, 20X9
Spot Rate 1.0292
Futures Price 1.0369
Basis 0.0077 1/7*0.0077= 0.0011 0Therefore, the lock-in rate would be the Opening Futures Price + Unexpired Basis on the transaction date. This therefore results in a lock-in rate of 1.0369 +.0011= 1.038.
As such, I calculated the financial result on using the futures contract (excluding the un-hedged amount) as 1.038 * (CHF 12.3 – CHF 50,000)= $12,715,500.
*I understood how to treat the un-hedged amount.
In relation to the workings for the futures contract I am a bit confused by the approach used by the examiner to determine the closing futures price and the financial result of the hedge.
Thank you.
Also, I don’t understand this working in the examiner’s solution.
12,692,225 = 12,250,000x – 105,350
12,250,000x = 12,692,225 + 105,350
so that x is US$1·0447 = CHF1.
Or
12,688,550 = 12,250,000x – 105,350
12,250,000x = 12,688,550 + 105,350
so that x is US$1·0444 = CHF1.What figure is the examiner trying to calculate? What is the logic behind the calculation?
Thank you.
With regard to the lock-in rate, as to whether you add or subtract the unexpired basis depends on whether the futures price is higher or lower than the spot rate. The lock-in rate has to be between the spot and the futures price.
So what you should have done is 1.0369 – 0.0011 = 1.0358
The examiner has done it two ways and accepted either answer. The first way he just apportioned between the March and June futures prices and arrived at 1.0361.
However he then shows an alternative below (which is strictly the correct way) and arrives at 1.0358 as above.
There are two sets of workings for your second question because the examiner allowed two ways of calculating the lock-in rate and that effects this part (only obviously one set of workings is actually needed).
Using the lock-in rate of 1.0358 means that the futures would give 12,688,550.
Using options would mean paying a premium of 105,350
So the workings are calculating what the spot rate would have to move to for the options to not be worth exercising and give the same net return as the futures.
In the same Q shouldn’t the premium of 105350 be converted at spot rate to get it in dollars?
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