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Dear Sir,
I
n this and other questions on futures, how I decide whether to buy or sell futures is buy checking if the contract currency is being bought or sold. The examiner uses a term that says ‘go long/short to hedge against the weakening of the euros’. What does this mean? Is it the same as saying ‘Buy June futures?’Going long is being futures (and then selling later). Going short is selling futures (and buying back later).
I was looking at an older post where you mentioned the examiner allows you to use the forward rate in your answer. So if I end up with 0.8651 as the potential futures price on 1 June, doesn’t that mean I need to include an additional step to show the potential gain or loss compared to what I got the future for at 0.8656 in March?
I can see why we refer to 0.8656 again when we note the futures price on 1 June to then calculate the spot rate but just got confused on what would happen if we decide to use the forward rate. I have watched your lecture and thought there are examples where we have to do this.
Sorry if this is a stupid question!
I don’t know what older post you are referring to and which question that post was referring to.
In Lirio we need to use the lock-in rate (as the examiner does in his answer). I explain what the lock-in rate is and how we calculate it, in my free lectures.
Hi John
Apologies I should clarify. I meant the question Lirio Co. Please see the below link for when when someone asked you a question about the forward rate being used. I thought it was ok to use but then got stuck on whether you need an extra step for any gain or loss on futures.
https://opentuition.com/topic/lirio-co-question-1-marjun-2016/
Thank you for your help
The examiner did indeed say that you could have used forward rates, and so presumably it would have been marked as correct.
However, what we should do is use the lock-in rate – there is no reason why the forward rate should be the same as the spot rate on the future date.
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