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Dear sir
Can you please explain why in predicted future rate un expired basis is added to current futures rate
I have learnt from your lectures that unexpired basis should be added or deducted from 6 months spot rate ( which here would be 6 month s forward rate being 125.3)
As the trend is that NOW spot is higher and futures lower ( spot = 129.2 futures = 125.2 ) hence unexpired basis should be deducted from future spot rate ( 125.3) and answer would be 124.729 ( which is not matching with examiner answer)I also have one more doubt
For future why profit or loss on selling of futures is not calculated
Example
640 × 125000 × (125.2 – 125.8 ) =48mI think that you need to watch my lectures again, because that is not what I say.
We do not know what the spot rate in 6 months time will be – if we did then we would not need to hedge at all. We certainly cannot assume that it will be equal to the forward rate.
The lock-in rate (which is what is being calculated) is calculate as being the futures price plus the unexpired basis (as shown in the examiners answer) or the current spot rate less the expired basis, which gives the same result.
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