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1) Why in calculating future, we need to assume that “basis decline in linear manner” ?
2) Why profit / loss in the futures need to calculate in ticks ?
3) How to determine 2/3 in finding the predicted future price ?
1. It must decline to 0. We assume it declines linearly simply because there is no way of knowing precisely how it will decline (and that is why there is still risk).
2. We don’t need to. It doesn’t matter whether you use ticks or don’t use them.
3. There is 3 months between March and June, and 2 months between March and the date of the transaction in May. However strictly the more correct approach is the second one show in the examiners answer (although either gets the marks in the exam).
Have you actually watched all of our free lectures on this?
Watched already but having difficulty to understand. Thank you for the answer 🙂
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