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Hi Sir,
I watched the lecture, read the notes and read the comments under the lecture.
Although I understand how to calculate the lock in amount, I do not understand its point/function.1. Will it only be required if we do not know the future spot rate (at date of transaction?) or should we ALWAYS use it even if we know that transaction spot rate (i.e. replace previous method)?
2. does the lock in rate represent the futures price/point at which we should cash-in our futures contracts? (i.e. to make our ideal hedge)
3. so we just multiply (number of contracts) x (contact size) x (lock-in – spot rate) =hedge result?
thank you in advance.
1. We only use the lock-in rate if we do not know what the spot rate is on the date of the transaction (which is usually the case in the exam).
2. No. It gives the net effect of converting at whatever the spot turns out to be and the gain or loss on the futures.
3. No – we just convert at the lock-in rate.
ok. I think I understand now. the ‘net’ effect, hence:
3. we multiply (number of contracts) x (contact size) x (lock-in rate) ?
is that correct?
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