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Could you pls help me to explain why this question does not calculate future as normal flow in BPP textbook?
I don’t understand why number of contract is Euro 20M/ lock in price?
1/ number of contract
Because normally, it should be used future opening price to calculate first in this case I think 20m/ 0.8656/125,000= 185
After that we should calculate future loss/profit as follows
2/ Hedge outcome
Opening future price 0.8656 (buy)
Closing future price 0.8650 (sell)
Future loss (0.8656-0.8650)*125,000 *185= (13,875)
3/ Net outcome
Spot market receipt – I cant calculate cuz lack of May spot rate. And this receipt should be deducted from loss from future calculated above.
Thank you1. When using the lock-in rate, it is more sensible to calculate the number of contracts using the lock-in rate. However the difference will always be negligible (and here makes no difference) and you would not lose marks.
2. The closing futures price is not 0.8650. We don’t know what the closing futures price (or the spot rate) is. 0.8650 is the lock-in rate, which is the net effect of converting the transactions at spot together with any profit or loss on the futures.
I do suggest that you watch my free lectures on foreign exchange risk management – especially the lecture on the lock-in rate.
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