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Hi John,
I am having difficulty in reconciling the approach taken in the solution to the futures question in question 2 in the March 2020 paper
Main issues is in the calculation of futures price in part (b).
Why did we not use the mid market rate in calculating current spot rate?i.e (0.8707+.8711)/2=.8709
1/.8709=1.1482
We then go on to calculate the futures price at 1.1431- am i correct in saying that this is the lock in rate of 1.1431 as we would not be able to calculate the futures price as we will not know the spot rate?
If this is the lock in rate why did we divide the dollar sum amount by this amount to get the euro equivalent-should this not be divided by the futures price?Also if this is the lock in rate is there any need to work out contracts etc-should we not just divide the 18,600,000 by the lock in rate and this will give us our answer?
Thanks
The futures price used is the lock-in rate and give the net effect of converting at spot together with any gain or loss on the futures. You could have used the mid-market spot to calculate it and would still have got the marks.
We do need to work out the contracts because the futures can only be dealt in fixed size contracts and therefore the lock-in rate is applied to the total contracts. Any remaining amount is an over or under hedge and either has to be left at risk or, better if available, we use forward rates on this amount.
Hi John,
In relation to the above question for part (c), we are asked to work out the futures position after each day on 1 March, 2 March and 3 March.
I understand that you have to compare the opening futures position with the closing futures position and determine whether a gain or loss has occurred depending on whether you have bought or sold futures initially. What I don’t understand in this question is when calculating the gain or loss, it is calculated as follows:
Difference in futures prices / tick size (1 March (1.1422 – 1.1411)/0.001) to give movement in ticks (12) X no of contracts (81) X $20.
What does the $20 above relate to?
Any help on the above would be much appreciated.
I also note that there doesn’t seem to be many exam questions relating to managing foreign currency exchange risk, maybe two or three that I can find. The examiner seems to focus a lot more on managing interest rate risk. I guess I’m just a bit confused on this as it’s difficult to get comfortable on foreign currency exchange questions when there are so few.
Thanks for all the help. I would be lost without your lectures.
$20 is the tick value, i.e. gain or loss for movement of 1 tick (0.0001) on 1 contract.
Since the contract size is $200,000, the tick value is 0.0001 x $200,000 = $20.
However, as I explain in my lectures, you don’t ever actually need to use ticks in the exam.
As far as foreign exchange risk questions are concerned, if you are referring to the past exams on the ACCA website then remember that (apart from this year because of covid) the ACCA no longer publishes every exam – only sample questions, twice a year.
Overall, foreign exchange risk management and interest rate risk management are asked as often as each other (every exam will have one question on risk management).
You should find plenty of forex questions in your Revision Kit.
Hi John,
Thanks very much for the quick reply. It’s clicked with me now.
Ah I see, so there probably is a lot more questions on foreign exchange risk but they just haven’t been published. The kaplan revision kit that I have, has a lot more interest rate risk questions than foreign exchange risk. I will have a look at the BPP kit to see is there more questions in there.
Thanks as always.
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