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In MJ22, question 2 b, per scenario (i), I understand that basis calculation should be the same with part a:
Opening basis = future – spot = 1.1552-1.1534 = 0.0018
Closing basis = 2/7*0.0018 = 0.0005
Future price = 1.1552- 0.0005 = 1.1554But the examiner’s answer is :
Closing basis : 1.1552-1.1434=0.0018
Future price = 1.1560- 0.0018 = 1.1542Please explain why. Thank you
What the examiner has written under scenario (i) is confusing.
His ‘alternative’ is more understandable.
They will convert at the actual spot rate on 1 August which is given as being 1.1534. The futures deal involves buying at ‘todays’ price of 1.1560 and selling at the price on 1 August which is given as being 1.1552.
Please explain the logic behind “alternative” method by examiner.
And what is the mistake in my method?The mistake in your method is because it is not as I have detailed in my previous reply, which is the correct method.
If the question gives the closing futures price then there is no point in attempting to calculate it, when the calculation is only ever an approximation given the basis does not actually fall linearly.
I am not going to explain the examiners ‘alternative’ because it is silly.
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