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P4 – Dec 2011, Q2b

Forums › ACCA Forums › ACCA AFM Advanced Financial Management Forums › P4 – Dec 2011, Q2b

  • This topic has 3 replies, 2 voices, and was last updated 11 years ago by John Moffat.
Viewing 4 posts - 1 through 4 (of 4 total)
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  • October 16, 2013 at 4:34 pm #142914
    brithel1
    Member
    • Topics: 3
    • Replies: 14
    • ☆

    Hello

    I need help on the calculation of the number of futures contracts. To be precise, I wish u know why 5/3 was used and how it came about. The same goes to the calculation of unexpired basis using the fraction 2/6.

    Thanks

    October 16, 2013 at 8:19 pm #142931
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Have you watched my lecture on this?

    Futures are always what are called ‘3 month futures’ which means that when the profit or loss is calculated, it is calculate as though it is 3 month interest. In order to protect ourselves for the interest on a loan lasting 5 months, we have to deal in more futures. So the amount of futures that we deal in is always the amount of the loan x (length of loan / 3).

    With regard to the 2/6 – it is not ‘unexpired’. It is because we assume that the basis falls linearly to zero over the life of the future. So, if the future finishes in 6 months time, then the basis will fall by 1/6 of the current basis each month.
    If we intend to finish the futures deal 2 months before the date on which the future finished, then the basis will be 2/6 of the current basis.

    My lecture on this works through a complete example and explains both bits above in detail.

    October 29, 2013 at 4:11 pm #144046
    brithel1
    Member
    • Topics: 3
    • Replies: 14
    • ☆

    Thanks a lot.That was really helpful.

    October 29, 2013 at 4:17 pm #144047
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    You are welcome 🙂

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