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Let’s say that a certain currency option expires on the end of a certain month, let’s say 30 june, now if the transaction we need to make also happens to be on the same day (30june) then there would be no gains or losses on futures prices? Right?
No – there will be a gain or loss on the futures. The price of the futures will have changed between ‘today’ when we start the futures deal, and the 30th June when we close the deal.
The gain or loss on the futures is due to the change in the price of the futures over the period of the deal.If you mean is there going to be a net gain or a net loss when we take into account the gain or loss on the transaction itself, then in theory there will be no gain no loss because the gain or loss on the futures will equal the loss or gain on the transaction.
However in practice they will not balance out exactly – partly because contract sizes usually mean that we cannot have a futures deal on exactly the amount required, and partly that the movement in the futures price will not equal exactly the movement of the exchange rate (due to the basis).
It does not matter whether the transaction is on the same day as the futures expire or not – my last paragraph remains true whatever the date.
There was a test your understanding in kaplan book where there was no gain or loss shown in futures market when the futures expired on the same day as transaction, so maybe your second paragraph is the reason why there was no loss or gain? Or there could be a mistake in that test your understanding? I mean normally in questions we do have a loss or gain in futures market that offsets to a certain extent gain or loss in open market transaction?
I have no idea what Kaplan have done or whether or not it is a mistake.
With regard to your last sentence, the whole point of using futures is for the gain/loss to offset the loss/gain on the transaction.
That is what I wrote in my last answer, and that is what always happens if we use futures.
However, they won’t exactly offset because of the contract size and because of the basis risk.What I have said is correct, and it really would maybe be worth your while watching my free lectures on this.
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