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Hello
I have a query regarding bpp mock exam one question number 2.
They have given spot rates and two month and three month forward rates .the futures prices are given for June future 0.6964
We choose June futures as per question for two month payment ..
As per question we are given two month forward rate as 1.433I have two things to ask ! Firstly that if on transaction date we are not given spot rate we can take given forward rate ..assuming it to be spot rate ?? Am I right
Secondly in the answer to estimate the basis difference they divide 1/1.433 …this is confusing why they 1/1.433 we get 0.6978.
..also I would like to mention that I got 44 in my previous attempt in June …I had a good exam but I was not able to complete …what piece of advice would there be a to focus this time …this is going to be my second attempt and I m looking forward to achieving this time .
Thank uThe BPP answer to this question is very poor.
We do not assume that the spot rate will equal the forward rate.
If you are not given the spot on the date of the transaction then you should use the lock-in rate (which I explain in my free lectures).
(BPP show this as an alternative answer, but in fact this is the correct answer if this were to be an exam question)
They need to take 1/1.433 to get the exchange rate quoted the same way round as the futures price. 1/1.433 = 0.6978
With regard to where to focus, it is impossible to really add anything to what the examiner says – that one question will always will focus mainly on risk management, and one question will always focus mainly in investment appraisal.
To add on the June futures is already given as 0.6964
It is the spot rate it’s given as 1.433
And when the answer finds the basis difference they compare 0.6964 and 1/1.433 ….I do not understand why they do 1/1.433 !! In any of us in bpp kit this is the only answer it’s done 1/1.433 ..is it because there is one month in between as the rate 1.433 is two month forward rate ..
The spot rates are quoted as €/Pound
The futures prices are quoted as Pound/€Therefore to calculate the basis, the exchange rate needs converting to Pound/€ as well.
However, again, the BPP answer is dreadful – they should not have used the same rate for both months anyway.
The correct approach is to use the lock-in rate as they have shown as an alternative answer.
(Out of interest, have you used the code in your Revision Kit to check on the BPP website to see whether there is a correction to this question?)
Thank u for ur kind response
I tried the code but ..due to frequent internet connection disruptions ..I left in middle .
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