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Dear John, thank you for you lessons.
I have a doubt regarding the amount received under the hedging using futures.
As per examiner answer futures are sold at the calculated rate, but what about the 80M Euro we should receive? Does it mean that the future can be exercised at any point in time before expiry?Thank you.
Best regards,
ToleaWe don’t exercise futures.
Here we sell futures now and then buy back on the date of the transaction. On the date of the transaction we 80M is converted at whatever spot is on that date and at the same time there is a gain or loss on the futures.
However since we do not know either the spot or the futures price on the date of the transaction, we have to calculate the lock-in rate which gives the net effect of converting at spot together with the gain or loss on the futures.
It is applied to the 80M received (which is 640 futures contracts).
Futures (in the exam) are never held to expiry.
So if we don’t know the spot and futures price on the date of the transaction, there is no need to calculate gain/loss on futures as we use the lock-in rate has which has the net effect from futures already included.
Did I get it right?
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