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Hi Mr John.
May you please guide how to calculate future in this questionAssume that it is now 20 April. Two months’ time Payments
Futures price September – 0.6983
Spot Price (1/1.439) – 0.6949
Basis – 0.0034 ( 5 months)we need only 2 – (0.0034/5*2) = 0.0014
0.6949+0.0014= 0.6963
Payment Euro – 393.265/0.6963= 273 830 pound
in the answer they take Spot (1/1.433). 1.433 is not spot rate it is 2 months forward rate. why forward rate is taken?. Can i take September future rate instead of jun rate?.
if to day is 20 April , plus 2 months is 20 jun, means we need to take the close rate which is september, why we take jun?
may you please answer and provide correct calculation.
thank you
I am sorry, but I do not have this question. I do seem to remember it being a past exam question, but I have all questions for the last 20 years so it must be older than that. Also, it is not in the current edition of the BPP Revision Kit.
On what you have typed, they should certainly be using June futures because they do not expire until the end of June but the transaction is on the 20th June.
Also, for the futures the should use the lock-in rate calculated in the way I show in my free lectures on foreign exchange risk management.
If my memory is correct and it is a past exam question, then I would expect the answer in your book to be a copy of the examiners own answers – that would mean that it is almost certainly correct 🙂
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