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Hi, i have the following confusing regarding this question. In part b ii), i am asked to comparing the hedging policies. In currency futures i was calculating the basis by using current price (spot rate) 0.8632 – futures price (0.8656)=-0.0024
Then i calculated the unexpired basis as -0.0024/4=-0.006
So my forecast futures price on 30 May = 0.8656- (-0.006)=0.8662
but the answer given is 0.8650
please explainYou should have subtracted the 0.006 (0.8656 – 0.0006 = 0.8650)
The spot and futures prices get closer together, and so the lock-in rate (which is what you are calculating) must be between the two.
Hi Sir,
I have assumed that spot rate in 3 months is 3 month forward rate so 1/1.1559. Then i added unexpired basis of 0.0006. When spot rate at the day of transaction is not given can we assume forward rate? thank you!
No. You cannot assume that the spot rate will be equal to the forward rate – it would be remarkable in practice if it were the same.
If the spot rate is not given (as it usually is not these days in the exam) then you calculate the lock-in rate (I explain what it is, and how to calculate it, in my free lectures on foreign exchange risk management).
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