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The lock-in rate needs to be calculated – you should watch my free lecture on the lock-in rate (you cannot expect me to type out all my lectures here 🙂 )
Good afternoon! Would you say that when the exam asks us to recommend a hedging strategy and let’s say there is an option of FRA, futures and options, if we use the lock-in rate for the first two, is that detailed enough? Or do we need to show all the workings (proceeds from the underlying and gain/loss on the hedge to offset it)? Thank you, sir!
The lock-in rate is only relevant when using futures. It is not relevant at all for FRA’s or options.
If you are given the spot rate on the date of the transaction then you should calculate the futures price at the date of the transaction. The you should convert the transaction at spot and separately calculate the gain or loss on the futures.
If you are not told the spot rate at the date of the transaction (which these days is more likely in the exam), then you must calculate the lock-in rate and use that.
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