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Lammer plc. jun 06 question

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Lammer plc. jun 06 question

  • This topic has 12 replies, 4 voices, and was last updated 4 years ago by John Moffat.
Viewing 13 posts - 1 through 13 (of 13 total)
  • Author
    Posts
  • May 23, 2014 at 4:35 pm #170341
    Ts
    Member
    • Topics: 8
    • Replies: 3
    • ☆

    Hello,
    in the above named question( part a on currency futures) when calculating the number of contracts why was 1.9035 used? Based on my understanding, the current futures price should be used, which is 1.8986. Pls can u explain why a different rate was used?

    Thanks

    May 24, 2014 at 9:01 am #170452
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    It is because they have used the lock-in rate. (Because we can predict the basis risk if we assume linearly, then we can predict the resulting effect of using futures).

    However, you do not need to do this.

    When deciding how many contracts to deal in, the effect of the above will always be minor and does not matter. If you had used the normal current futures price of 1.8986 you would still have got full marks (and the same number of contracts).

    May 24, 2014 at 11:45 am #170494
    Ts
    Member
    • Topics: 8
    • Replies: 3
    • ☆

    Thanks Sir! Is it okay to simply use the lock-in rate to know the effect of using futures when we are not given adequate information? In the question above we were not given the closing futures rate which could be used to determine the profit or loss as a result of hedging.

    May 24, 2014 at 1:38 pm #170510
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    Yes.

    In general, much more important is that you prove you know how futures work – proving this is worth more than the numbers themselves

    April 26, 2015 at 9:41 pm #242856
    sehrish
    Member
    • Topics: 13
    • Replies: 29
    • ☆

    In this question we can find out closing future rate as,
    Spot future
    1st jun 1.9156 1.8986

    31st Oct 1.9029 1.8980

    Basis risk 0.017 x 2/7 = 0.00486
    1.9029-0.00486= 1.8980
    But in the exam kit solutions, they added 0.00486 + 1.8986=1.9035
    In all other questions I’ve been following that if there is increasing trends so add the monthly apportioned basis risk or vice versa , it’s very confusing
    Plz guide me
    Thanks

    April 26, 2015 at 10:37 pm #242857
    sehrish
    Member
    • Topics: 13
    • Replies: 29
    • ☆

    And 2nd question is
    While calculating currency option @ ex price 1.92, closing spot 1.9029
    Claim back profits of option is 0.0171x19x31250= $10153/ 1.9081 1.9081 is selling rate as should be, while in book solutions they have used 1.9029 which is buying rate
    Why?

    April 27, 2015 at 7:47 am #242887
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    First question:

    As I wrote in my first response on this page, they are not calculating the closing futures price. Instead they are calculating the effective lock-in rate. You could do either. You can find out about the lock-in rate by watching the free lecture.

    Second question:

    I only have the examiners own answer to this question, which shows the results in a different way. Without seeing the full answer that you are looking at it is not possible for me to explain what they have done.

    April 27, 2015 at 12:27 pm #242925
    sehrish
    Member
    • Topics: 13
    • Replies: 29
    • ☆

    Ok thank you so much, gonna watch that lecture,

    I calculated profits on option to claim back, gain on exercising option is $10153
    I need to convert it into local pounds
    From the rate ($/£) 1.9029-1.9081
    I’m using selling rate 1.9081 as I’ll sell the dollar gain to get my local currency, as dollar is first currency so I’m using sell rate,
    Plz correct if above mentioned is wrong
    Thanx loads tutor for being helpful

    April 27, 2015 at 12:30 pm #242926
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    What you have done seems correct to me 🙂

    November 17, 2020 at 6:57 pm #595346
    rifraz
    Member
    • Topics: 0
    • Replies: 4
    • ☆

    Hello,

    My question is regarding part c of this question. I have property calculated the exchange rates for 5years. And I thought EMV can be calculated by taking sum of present value of 4.2m/exchange rate and then discounted by 11%. But examiner has taken “difference to spot” calculation for 5years and then he has been discounted those cashflow to get the EVM. Could you kindly explain me the logic behind taking “difference to spot” calculation here?

    Thanks Sir,
    JM

    November 18, 2020 at 8:57 am #595393
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    The question asks for the effect on the market value. So it wants to know how much the market value will be changed by.

    You can get the same result in 2 ways. Either calculate the PV if the exchange rate stays at the current spot, then calculate the PV with the estimated exchange rates, and look at the difference in the PV’s; or, (and slightly faster) look at the differences in the cash flows (as in the examiners answer) and calculate the PV of the differences.

    Either approach is valid and gives the same end result 🙂

    November 18, 2020 at 12:57 pm #595437
    rifraz
    Member
    • Topics: 0
    • Replies: 4
    • ☆

    Wow. Now its clear. Thanks Sir 🙂

    November 18, 2020 at 1:25 pm #595442
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54695
    • ☆☆☆☆☆

    You are welcome 🙂

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Viewing 13 posts - 1 through 13 (of 13 total)
  • The topic ‘Lammer plc. jun 06 question’ is closed to new replies.

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