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1. How to calculate expected forward rate in less than 1 year?
In D’12 Q2, the expected forward rate in 4 months is calculated as:
142 x (1 + (0·085 + 0·0025)/3)/(1 + (0·022 – 0·0030)/3) ;
In J’11 Q2(c), the expected forward rate in 6 months is calculated as:
expected forward rate in one year = 128 x 1·108/1·022 = 138·77
expected forward rate in 6 months time = 128 + (138·77 – 128)x(6/12) = 133·4Why is the method different? Under what circumstances should i use the first and the second method?
2. How to calculate SPOT CROSS RATE?
S’18 Q1a there’s a calculation on spot cross rate and i can’t understand the figures used. Is there a formula for this?For the first question i asked,
if i use the first method to calculate D’11 Q2c, i’ll get the same answer.
if i use second method to calculate D’12 Q2, i’ll get an answer of 145.18 instead of 145.22.Your first question:
For the exam, either method is OK, and the difference is tiny and irrelevant as far as the marks are concerned.
Your second question:
It is dangerous to learn a formula because it depends on which way round the currencies are having to be converted.
You will find an explanation of how the rates are calculated here:
https://opentuition.com/topic/sep-2018-2/Sir,
Regarding delta which measures the change in option value which would result from a $1 change in the value of the underlying asset, what is the “underlying asset” when it comes to hedging of foreign exchange currency with option? Is it the Contract size currency?You cannot be asked about deltas in regard to foreign currency options – only in regard to share options. You cannot be asked to calculate an option value for foreign currency options.
The reason is that the BlackScholes formula is only for share options (and real options) – for foreign currency options the formula has to be amended. The previous examiner did bring in the amended formula for a short time, but quickly removed it from the syllabus 🙂
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