- This topic has 1 reply, 2 voices, and was last updated 3 years ago by
.
- Posts
Hi sir, just wanted to clarify
1) wheneber we are hedging using options do we need to find spot rate at date of transaction to find the amount we would receive if option was not exercised?
2) when interest/inflation rates are not given the spot rate is calculated as
futures amount= no of contracts x contract size x spot rate (x)- premium
so if futures amount is in $ and the contract size is also in $ to convert the contract size into another current (suppose pounds) will we multiply/divide the contract size by the spot rate or the exercise price or the futures price to find spot rate at date of transaction of $/£?1. It is very unlikely indeed that an exam question will require you to forecast a future spot rate when illustrating the use of options (forecasting future spot rate is only relevant in the exam when appraising investments in another country). With option questions you are either told what the future spot rate is, or are expected to state the worst outcome when using options.
2. The spot rate is never ever calculated in the way you have written. (And interest rates would not be relevant anyway because they are used to calculate forward rate, not to forecast future spot rates which is done using purchasing power parity).
You really need to watch my free lectures on the management of foreign exchange risk.
- The topic ‘spot rate’ is closed to new replies.