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Hi John,
I do not quite understand the answer to the following actually easy question (question 1 in 2018 exam):
80m EUR receivable in 6 months time.
Currency Futures (contract size EUR 125,000, quotation JPY per EUR 1):
Four-month expiry 126.9
Seven-month exp. 125.2What is the expected receipt in JPY?
Why do they just calculate the expected futures rate of 125.8 and then calculate the receivable by 125,000 EUR x 640 contracts x 125.8 = JPY 10,064?
I thought for that you need to 1) calculate the receivable at the current spot rate, which we do not know in this case, but could calculate 2) calculate the gain / loss of the futures deal, for which we would indeed need the calculated expected futures rate of 125.8
But why is the receivable calculate by simply taking the 125.8? I am confused…
Thank you,
MargaritaThe examiner shouldn’t really call 125.8 the expected futures rate.
It is actually the ‘lock-in’ rate which can be calculated in several ways but is the rate giving the net effect of converting the transaction at spot together with any gain or loss on the futures.
I do explain this (and the calculation) in my free lectures on foreign exchange risk management.
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