- This topic has 3 replies, 3 voices, and was last updated 1 year ago by
.
- Posts
Dear Tutor,
thank you in advance
i am struglling with understanding logics in predicted futures rate, for logic from case to case semms inconsistent
for example, in past paper from March/June 2021, Question 3, Gogarth Co
Predicted futures rate = 0·2366 + ([0·2378 – 0·2366] x 2/3) = 0·2374
where June future price + (difference sep and june) *2/3 (i assume because july+august (where it is closed under this contract)/(july+aug+sep, when it is end by terms)
or
Alternatively, use spot rate, 0·2358 + ([0·2378 – 0·2358] x 4/5) = 0·2374where May 1 spot rate + (difference sep and may) *4/5 (i assume because may+june+july+august (where it is closed under this contract)/(may+june+ july+aug+sep, when it is end by terms)
so i assume i understand the logic written above.
However, now i am solving Boullain CO, where other approach is used for calculation
Calculation of futures price
Spot rate (US$/€1) = 1/0·8707 = 1·1485 ( spot at march 1)Predicted futures using spot rate = 1·1422 + ((1·1485 – 1·1422) x 1/7) = 1·1431
where Sep 30 future rate + (difference march 1 spot and Sep 30 future rate ) *1/7 (i assume because august (where it is closed under this contract)/(march+april+may+june+july+aug+sep, when it is end by terms)
Or using futures: 1·1422 + ((1·1449 – 1·1422) x 1/3)) = 1·1431
where Sep 30 future rate + (difference june future rate and Sep 30 future rate ) *1/3 (i assume because august (where it is closed under this contract)/(july+aug+sep, when it is end by terms)
Why in solving Boullain CO the solution of Gogarth Co is not used, now if i use the logic of Boullain CO to Gogarth Co i will have :
Predicted futures rate = 0·2378 + ([0·2378 – 0·2358] x 1/4) = 0·2383
where Sep future price + (difference sep and june) *1/4 (i assume because august (where it is closed under this contract)/(june+july+aug+sep, when it is end by terms)
i dont understand why in these two problems different solving is used, would appreciate you help
with best regards,
AidanaI believe that there is a mistake and they should use September rate 0.2378 related to September instead of 0.2366 which is June’s rate, as the payment would occur in August hence there will be one month unexpired.
The unexpired basis should be calculated as (0.2378- 0.2358)*1/5
Can the tutor confirm please?
There is no mistake.
The futures price at the end of August can either be calculated by average between the June and September futures prices (which is the first of the workings that Aidosha has shown.
Alternative, and strictly more correctly, it can be calculated in the way Aidosh has shown the second of her workings) which is the spot rate of 0.2358 + the expired basis of 4/5(0.2378 – 0.2358).
(Which is of course the same as the September futures price of 0.2378 – the unexpired basis of (0.2378 – 0.2358) x 1/5 )All of them gives the same result of 0.2374
The examiner always accepts any of the approaches, and the answer will be the same whichever approach is used.
- You must be logged in to reply to this topic.