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Hello Sir,
Can you please explain that why in polytot question regarding part a why in options part outcome over hedge amount of 21,858 is divided by 1.5374 & not by 1.5337 since it is a payment as in future part (a) the over hedged amount of 1883 is divided by 1.5337?
Please explain the following paragraph:
“The future market hedge aims to give the same locked in exchange rate as is obtainable from the forward market, but a few more uncertainties are involved.”
thank youThe over hedge on the options should have been converted at 1.5337 (the answer is wrong to convert at 1.5374)
With regard to the paragraph, using futures does effectively fix the exchange rate (as does using forward rates). However, it is not as certain because we assume that the basis changes linearly, which in practice it may not. This means that the actual outcome might be a little different than what we forecast – i.e. not completely certain as it is with forward rates.
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