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Interest rate hedges (June 2005)

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Interest rate hedges (June 2005)

  • This topic has 5 replies, 2 voices, and was last updated 1 month ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • August 5, 2023 at 9:29 am #689407
    Varun.J.Thakkar
    Participant
    • Topics: 73
    • Replies: 111
    • ☆☆

    Current date- 1 June
    Invest on – 30 October for a period of 4months
    December futures is at 96.6 ie 3.4%
    Current spot rate is 4%
    Spot rate on 30 October is not given

    Dear sir,
    What’s the reason behind calculating “lock in rate”? Is it estimating the spot rate on 30 October and what’s the logic behind the calculation?
    They calculated it as 100-( 96.6-0.171)= 3.571%

    IF it is estimating the spot rate on 30 OCT, I did it as 4%+ (-0.6%/7*5) and I got exactly the same answer…Can I do it this way??

    Please advise on this…Thanks a lot

    August 6, 2023 at 8:41 am #689444
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    The lock-in rate is not estimating the spot rate. It is calculating the net effect of using the actual rate at the date of the transaction and the gain or loss on the futures.
    I do explain this in detail in my free lectures.

    What you have done is OK, but depending on what is asked in a question it is important to be able to explain how futures actually work.

    August 9, 2023 at 11:28 am #689615
    Varun.J.Thakkar
    Participant
    • Topics: 73
    • Replies: 111
    • ☆☆

    I saw the lecture. It’s really amazing when things are “proved”. Thank you
    I understood the concept of lock in rate but in the exam, can I just calculate it the way I did?
    I hope that wouldn’t be an issue

    August 9, 2023 at 4:54 pm #689629
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    Yes, you can do as you wrote in your earlier post. However, as I wrote, just in case you are asked to write about it then make sure that you are clear as to what strictly happens.

    August 9, 2023 at 5:13 pm #689634
    Varun.J.Thakkar
    Participant
    • Topics: 73
    • Replies: 111
    • ☆☆

    Thanks a lot sir. And the lecture was very helpful

    August 10, 2023 at 7:36 am #689654
    John Moffat
    Keymaster
    • Topics: 56
    • Replies: 53169
    • ☆☆☆☆☆

    You are welcome (and thank you for your comment 🙂 )

  • Author
    Posts
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