- This topic has 1 reply, 2 voices, and was last updated 1 year ago by John Moffat.
November 12, 2020 at 12:49 pm #594792adamliew
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after i watch your video regarding the tick value and lock in rate, i feel confuse with the lock in rate, if the question provide inflation or interest rate, can i estimate the future spot rate and calculate the future price by using these information?
when estimate spot rate, we need use inflation (because purchase power parity) , when estimate forward rate, we use interest rate. but sometimes, we can assume the forward rate is same as spot rate. so we can use interest rate to estimate spot rate too? is that right?
if the question have provide interest and inflation rate, can i use lock in rate which you show in video?
moreover, you substract the current future price by 0.0133 because we assume the basis risk will fall linearly to zero at the end of future
basis 0.04 0.0133
Sir, we do 1.16 + 0.0133 is to find (X) and it will be the future price at march?
but it make me confuse with the estimate future price with provide spot rate
and what is mean by if we convert the contract at lock in rate (1.1733) it will give net effect of converting at sport and gain/loss on future.
and the problem is only apply to total amount contracted ? what is that mean,
sorry john, im not good in understanding.November 12, 2020 at 3:09 pm #594797John MoffatKeymaster
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If we know the spot rate (or the futures price) at the date of the transaction then we are able to convert the transaction at spot and calculate the gain or loss on the futures deal. The two together give the net result on the date of the transaction.
However it is more common in the exam not to be told the spot rate or the futures price on the date of the transaction. In that case we calculate the lock-in rate and apply that to the amount – it will give us the same result.
We are not trying to estimate the spot rate on the date of the transaction, so inflation is irrelevant.
The lock-in rate is not what the futures price will actually be on the date of the transaction, but applying it will (as I have explained above) give the same net result.
As I explain in the earlier lectures, futures are dealt with in fixed size contracts (the size is given in the exam). Because we round to the nearest number of full contracts the amount using futures will not be exactly the same as the amount of the transaction.
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