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- August 28, 2021 at 8:07 pm #633265
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,

AidanaDecember 5, 2021 at 1:41 pm #642599Hi , did you get any reply on this?

December 5, 2021 at 1:44 pm #642600I 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?

December 5, 2021 at 3:42 pm #642617There 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.

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