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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?
Strictly 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.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?
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