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In your video lecture of lock in you have calculate the overall affect which not consistence with the method shown in Future currency lectures,In lectures we first calculate
Transaction at the spot rate on the transaction date and THEN calculate the profit and loss on the future deal. I get confuse.
Kindly show this for question Casasophia.
I understand the lock in rate calculation i.e Current spot price 1.3618+ and basis difference 0.0064=1.3682.
What is 1.3682, Future price on transaction date or the Spot rate on the transaction date??
And how it will be used in the(Please show in 2 steps)
1- Normal transaction at spot rate at the transaction date
2-Profit/ Loss on futureAnd last thing the lock in rate is used for the calculation of No. of contracts, we used the today future price of future although after rounding the number of contract are same i.e 117
The lecture on futures explains how futures work in practice – the transaction is covered at the spot rate on the date of the transaction, and at the same time the futures deal is finished and there is a profit or loss on the futures. The two together give the net cash flow on the date of the transaction.
You are expected to know how futures actually work, and if you are told the spot rate on the date of the transaction then this is the best way to deal with it.
The lock-in rate is calculating in advance an exchange rate which will give by itself the net effect on the date of the transaction (because, as you will know from the futures lectures, the only reason the effective net exchange rate at the date of the transaction is different from the current spot is because of the change in the basis, and this we can predict).
If you do not know the spot rate at the date of the transaction then you should calculate the lock-in rate and use this to calculate what the overall cash flow will be on the date of the transaction. (The lock-in rate is not the futures price or the spot rate on the transaction date – it is the rate then when applied will give the net effect of the transaction together with the profit or loss on the futures.)In calculating the number of contracts, then if you are using the lock-in rate then you should use this to calculate the number.
I am sorry but I am answering over 100 questions a day, and I do not have the time to provide an alternative answer for Cassiopeia.
No problem sir. I can understand.
One more thing i need to know that is you said that when we use lock-in rate then we have to use lock in rate for the no of contracts, but in Question CMC June-2014 you have use the today future price, instead of lock-in rate why?To be perfectly honest, it is arguable always as to which rate to use for calculating the number of contracts. For CMC maybe it would have been better if I had used the lock-in rate.
However, don’t worry too much about this for the exam. Usually (because of rounding to the nearest contract) it doesn’t make any difference which rate you use, and if it does then it is probably only 1 contract different.
The markers for P4 are very good, and you won’t lose marks if you are one contract different from the examiners answer (even though obviously the resulting numbers will be different). The marks are for proving you know how things work, and not for the final result.
(and the examiners themselves have not been consistent as to which rate they have used 🙂 )
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