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Dear Mr Moffat,
in the Frongoch Co I am not able to 100% understand the result of the futures hedge in scenario ii).
I calculated the result of the hedge itself under the assumption that basis reduced up to 0,0007 for the remaining 2 months and hence (0,1556-0,1549)*146*125000 gives 7300$ hedge result.
But in the underlying transaction itself – I calculated it using spot rate August 1 (1,1549), but in the answers they take underlying transaction at the initial lock-in rate. Why?
Thank you in advance.
Converting at the lock-in rate is calculating the net effect of converting the transaction at spot together with the gain or loss on the futures.
Have you watched my free lectures explaining the lock-in rate?
Thank you Mr Moffat,
yes, I have seen your lectures together with reading technical articles.
But still, in real life they would convert the underlying transaction at spot and then calculate gain/loss on futures (using P2 and P1). P1 is given, P2 is calculated using a changed basis …
It is not clear for me why we refer to the old lock-in rate (before we learnt about the change in basis).
Ok, now I even reviewed the election one more time.
So, there you say that we effectively fixing the result – whatever spot rate is, the change in the futures price will then cover the difference in spot and we effectively lock the rate. This I understand.
But in the case of the question I can not understand any more.
In my eyes, if we take the lock in rate-result then we need to add the delta between lock-in and new calculated rate (based on the updated basis) OR
We take spot rate and the delta between futures today and futures based on the NEW BASIS..
But they mix the two…
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