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Sir can you tell me why are we substracting the remaining basis of 0.0078 from opening futures for the lock in rate,wont this be added as the opening future price is less than the spot rate ?
Also sir in some questions for currency futures the profit or loss is calculated whereas in some its not..so do we always calculate the profit or loss on futures?
thanks alot
In the answer it has been added to the current futures price of 1.5275.
The spot and futures prices get closer together over time, and so the lock-in rate is always between the current spot and the current futures price. Currently, December futures are lower than the spot rate so the lock-in rate will be lower than the current spot (and higher than the current futures price) which is the case in the answer.
We can only calculate the profit or loss on the futures if we are told what the spot rate is on the date of the transaction (and can therefore calculate the futures price). Usually we are not told the spot rate on the date of the transaction and therefore use the lock-in rate instead (which gives the net effect of converting at whatever the spot rate happens to be together with the profit or loss on the futures).
thankyou for your quick reply sir but I am still confused as to when to add or substract the reamaining basis to the opn futures price..is the rule that if open futures price is less than spot so we substract ??
Also can you pls explain what are they doing in this question in general for currency futures why have they added 0.0078 to 1.5275 and used 1.5353 and then found the closing futures..
thanks
To get the lock-in rate, you either adjust the current futures price by the unexpired basis, or alternatively you adjust the current spot rate by the expired basis. Both give the same result.
The examiners answer has done the first alternative: 1.5275 + 0.0078 = 1.5353.
The other alternative (adjusting the current spot) is: 1.5510 – 0.0157 = 1.5353
(0.0157 = 4/6 x 0.0235).
As to whether to add or subtract when adjusting, you do whichever produces a result that lies between the current spot and the current futures price.
Have you watched my free lecture on the lock-in rate?
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