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Dear Sir,
As the question says any amount not hedged by a futures or option contract will be hedged using the forward market, could you kindly explain how to get an unhedged amount of CHF 50,000?
The total at risk is 12.3M CHF.
The use 98 contracts and each contract is of 125,000 CHF, and so they have used futures on a total of 12.25M CHF.
This leaves 50,000 CHF not hedged using futures.
Have you watched my free lectures on the management of foreign exchange risk?
Hi John,
Following on this question. They predicted the futures rate using two methods. I usually get the same result using both methods except here. The explanation given in the answer is not quite clear to me. I thought we would close the contract and this futures price should be the same under both methods.
Grateful if you could perhaps explain that bit for me.
Thanks and regards,
Camilo
Have you watched my free lectures on this, because I explain the best way in my free lectures.
Sir,
I am a little confused about the futures price predicted in the suggested answer in acca site.
I calculated the closing futures price using the technique explained by you in the lectures. In the question there is no closing spot rate provided and hence I used the six month forward rate to calulate the Closing Futures price as on 31 may 20×9.
As on 30Nov. Spot rate is 1.0292 and futures price is 1.0369 Hence, Basis = -0.0077
Similarly as on transaction date 31May 2009 I assumed the spot rate to be the six months forward rate 1.0358. Now the Unexpired basis For remaining one month = 1/7 * .0077 = -.0011.
Therefore predicted futures price = 1.0358 + .0011 = 1.0369.Hence I predicted futures price as 1.0369. Is it correct ? Can we use forward rate as above to calulate futures price if the spot rate on transaction date is not given in question ?
If not closing spot rate is given (which is usually the case in the exam these days) then you use the lock-in rate, which gives the net effect of converting the transaction at spot together with any gain or loss on the futures.
I do explain what the lock-in rate is, and how to calculate it, in my free lectures on fire exchange risk management.
You do not assume that the closing spot rate will be equal to the forward rate.
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