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Dear Tutor.
Re the Lecture Title above, (Foreign Exchange Risk Management Currency futures lecture 3a)
I see each time a single rate is not given (i.e spot), what you have done is to find the mid point for both spot rate now and in future for us to estimate future prices at the date of transaction.
My question is this, since we Know that and we have used $/£ 1.4821 as the spot rate today (when we calculated the “Reference Point” and that is the correct spot rate, so why did we not use this 1.4821 and the future spot of $/£ 1.4791 Only is the calculation to estimate the futures price at the Transaction Date? Why do we have to use Mid-Point? Is this a rule we must follow?
Please explain
Thanks
The only reason for calculating the mid-market price is to be able to estimate the futures price. (The reason being that there are two spots – depending on whether we are buying or selling – whereas there is only one futures price)
Thanks John, so we must always do it this way then once we have the 2 spot rates. One more question, if we had 2 future prices? what do we do? Which one will be the spot to Use and set up the deal Today
Thanks
The relevant spot rate follows the normal rule – depending on whether you are buying or selling the currency. If there were two futures prices (which there will not be) you would use the one that corresponds to the spot used (i.e. the lower or the higher as with the spot).
Thanks John and sorry for repeating, I just want to get through this final paper this time.
So what i understand is that once we have 2 spot rates, we use the Mid points in the calculation to estimate futures?
Thanks
That’s correct. (Some answers do not bother and just use one of the rates, but it is more sensible to use the mid-point)
Thank you so much, I will remember that. I was previously confused because some text books did not use Mid Points but thanks for clarifying this.
Regards
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