• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

futures price confusion

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › futures price confusion

  • This topic has 8 replies, 3 voices, and was last updated 6 years ago by John Moffat.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • August 29, 2018 at 4:38 am #469932
    abbas7796
    Member
    • Topics: 135
    • Replies: 256
    • ☆☆☆

    hello john

    hope you are well

    i have a slight confusion in future currency hedging

    lets say we are due to receive a payment from abroad in US$ in 4 months time and local currency is £

    then in this case spot rate is usually known in question but i am confused as to which future price to use in order to buy or sell contracts.

    is it 5 month future expiry price or 4 month future expiry price

    please explain which and why

    thanks

    August 29, 2018 at 8:57 am #469967
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    It is neither!! You will deal in the futures that first mature after the 4 months. You will then calculate the lock-in rate to apply.

    This is all explained in my free lectures on foreign exchange risk management.

    August 29, 2018 at 11:12 am #469993
    abbas7796
    Member
    • Topics: 135
    • Replies: 256
    • ☆☆☆

    hi john

    please look at this question

    P4 June 11 2ai

    over here why did we take out 4 month future price when we are due to receive payment in 4 month?

    what you said is that we always take 1 month after the 4 month matures. in this case we should have taken 1.3698, the fifth month expiry price.

    why did we work out the 4 month which was not given in the question?

    thanks

    August 29, 2018 at 9:14 pm #470055
    abbas7796
    Member
    • Topics: 135
    • Replies: 256
    • ☆☆☆

    hi john

    i guess i know where my confusion is

    when the question says “futures at 4 month expiry” or for example “2 month expiry” then this is referring to the end of the that particular month. this is why in the above question that i mentioned we had to calculate the future price at the start of the 5th month since the question had 5th month expiry price which is basically at the end of the 5th month

    is that right?

    August 30, 2018 at 4:40 am #470087
    Nhan
    Member
    • Topics: 4
    • Replies: 7
    • ☆

    I think after 4 months’ time, the company will receive $20m in $US but at present it wants to invest in treasury bills, so using future contracts. If you use the 2-month contracts, it will take much more contracts and you dont know after the first 2 months, what rate it will be.

    August 30, 2018 at 11:22 am #470149
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Nhan: Please don’t answer in this forum – it is the Ask the Tutor Forum and you are not the tutor (but please do help people in the other AFM forum).

    Abbas7796: The payment will be received in 4 months and therefore ideally we would use futures expiring in 4 months (and the examiners answer estimates a 4 month futures price by apportioning between the 2 month and 5 month prices).
    Strictly, however, it is better to calculate the lock-in rate for 4 months (as the examiner states in the answer). I explain in my lectures everything about calculating the lock-in rate.

    August 30, 2018 at 6:07 pm #470205
    abbas7796
    Member
    • Topics: 135
    • Replies: 256
    • ☆☆☆

    thanks john much appreciated

    one more confusion.

    formula for basis is spot rate – futures price.

    lets say spot rate is 100 and futures are 90 so the total basis is positive 10
    however if the spot rate is 90 and futures are 100 then total basis is negative 10
    lets assume its just one month

    so am i right in saying that when the basis is negative then we add the basis to the spot rate of the future in order to get the future basis and when the basis is positive then we deduct?

    is that right?

    August 30, 2018 at 11:46 pm #470239
    abbas7796
    Member
    • Topics: 135
    • Replies: 256
    • ☆☆☆

    hi john

    please ignore what i have written above. apologies for that.

    i just want you to correct me if i am wrong below.

    1) formula for basis is futures price minus the spot rate. if this number is negative then we subtract the unexpired negative basis from the spot price on the day. if the number is positive then we add the positive unexpired basis to the spot price

    2) formula for lock in rate is futures price +- unexpired basis. we add the unexpired basis to the futures price if the basis is negative. we subtract it if positive.

    please correct me if i am wrong

    thanks

    August 31, 2018 at 5:51 am #470273
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are correct in both cases.

    I find that rather then learn it as a rule, then it is easier just to realise that the spot and futures prices will get closer together. So the lock-in rate will always be between the spot and futures prices.

  • Author
    Posts
Viewing 9 posts - 1 through 9 (of 9 total)
  • The topic ‘futures price confusion’ is closed to new replies.

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • adebusola on MA Chapter 1 Questions Accounting for Management
  • Sharith on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • Sharith on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • John Moffat on Discounted Cash Flow Further Aspects, Replacement – ACCA Financial Management (FM)
  • o1lim on Discounted Cash Flow Further Aspects, Replacement – ACCA Financial Management (FM)

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in