Hello sir,
Sir in the future Contract part, shouldn't the Lock-in rate of 0.8650 be applied to the amount under the future contract (185*125000) rather than the actual receipt of 20m euros?
I'm confused why the examiner has applied the Lock-in rate to the actual 20m receipt?
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Lirio (Mar/June16)
4y ago#1Strictly you are correct and there is a small over hedge.
As the examiner has written in his answer, because the over hedge is only small it is not material.
However if you had applied the lock-in rate to the contract amount then although the result would be slightly different you would still have got full marks.
Got it! Thank you sir.
Sir, there's another question related to this.
If I apply the lock-in rate to the contract amount as you said, I get the answer in euros. And there's no spot rate given at the transaction date.
My question is how do I convert this receipt into $. Can I use the forward rate for this?
4y ago#4When the lock-in rate is applied, it does convert the receipt into $'s.
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