Hi Sir John, on the futures hedging, can I check if both methods are correct?
Is there any particular method that i should use in exams? Noticed that method 1 has less steps.
Method 1:
Using lock-in rate,
Buy Dec futures at 1.5275
Basis risk today = 1.5510 - 1.5275 = 0.0235
Unexpired basis on transaction date (31 Oct) = 0.0235 x 2/6 = 0.00783
Lock-in-rate = 1.5275+0.00783 = 1.535 (dollar per pound)
Receipt of USD 4,124,236 (convert to pound) = 4,124,236 / 1.535 = 2,686,798
Total receipt = 2,686,798 + 1,502,128 [this is derived by 270m/ (156.3*1.15)]= 4,144,486 (in pound)
Method 2:
Buy Dec futures at 1.5275
Basis risk today = 1.5510 - 1.5275 = 0.0235
Unexpired basis on transaction date = 0.0235 x 2/6 = 0.00783
Spot rate on 31 Oct = 1.5374 [1.5398-(1.5398/1.5178)/9]
Expected futures rate on 31 Oct = 1.5374 - 0.0078 = 1.5296
Net receipt:
Spot market : USD 4,124,236 / 1.5374 = 2682605
Futures market : Gain = 1.5275 - 1.5296 = 0.0021
(43 contracts x 62500 x 0.0021 )/1.5374 = 3671
Net receipt = 3671 + 2682605 = 2686276 (in pound)
Total receipt = 2,686,276 + 1,502,128 = 4188404 (in pound)