# ACCA P4 Foreign Exchange Risk Management Currency futures lecture 3b

If you have not watched the previous lecture then do so, because I go through a more basic example just to explain the principle behind the use of futures. Of course there is basis risk! Comments I have problems with the adding and subtracting of remaining basis risk in the furture rate of the closing date. The lectures are really easy to follow and help us understand the topic of derivatives quickly. Dealing in a future of 62, means you are at risk on 62, If we are not given the futures price on the date of the transaction then we need to calculate the basis risk.

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Although it is unlikely that you will be given two prices again in the exam. It happened on one question set by the previous examiner, but he is no longer the examiner. Thank you very much for the very clear explanation of foreign currency risk management. Dear Sir, can u explain the concept of tick size in detail..

I m really struggling in that.. Dear Sir, Thank you very much. I was confused a lot on this topic in the past. The lectures are really easy to follow and help us understand the topic of derivatives quickly. At the end of the lecture it state that future is only suitable for large amount hedging, since there is no point gambling 62, pound which is larger than the hedge. I was wondering the contract currency of 62, pound is it the deposit to make a deal in futures? Dealing in a future of 62, means you are at risk on 62, So if the transaction was say only 5, then dealing in a future would be increasing the amount at risk!

After your examples and work through i got a confident, that was until i attempted to do Q2 of June , the whole exchange rates got me confused again. Where can i find the rest of the lectures for P4? The site only shows lectures from chapter ? I need the rest as I studying it myself. There are no more lectures — the other topics are covered in the Course Notes, but not in lectures. Kindly explain if we are given 2 futures rates as was given in recent exam. You told us to take Open Rate for buying future and Settlement Date for selling future.

Have I understood it correctly! Outstanding explanation, but have a question in finding No. I know that some answers use the futures price and other answers use the spot rate.

Does it mean that in the exam the future price at a future date is not given. Sometimes the futures price on the future date is given, but usually it is not given and of course in real life you will have no idea what will happen to the futures price in the future.

Remember that the financial manager is not dealing in futures simply to try and make a profit — this would just be gambling. They are using futures to make the profit or loss on the futures equal to the gain or loss on the actual transaction, i. Hershey, for interest futures if you are borrowing then you buy futures but if you are lending you sell futures.

If you are borrowing then you sell futures now and buy later because if interest rates go up, the futures price will fall and you then buy later at a lower price and make a profit. But hei if i had not hedged i would have lost pounds of ! I can accepts that.

Iam still following and catching on, still waiting for more challenges to come. In June paper Q2 we are asked to hedge US dollar receipt.

We are given currency futures but examiner does not provide neither the spot rate nor the price of the future at the transaction date. In the answers provided, the examiner does not uses mid- market prices when he arrives at the futures price. I am a bit confused with the way examiner presents his answer. Would appreciate some explanations, please.

The examiner has done it two ways. One way he has done it is simply to apportion between the 2 month and 5 month futures prices.

The more accurate way is the way that he has put in brackets. He has not used the mid-market spot because he is finding a lock-in rate, but using mid-market spot would still have got full marks even though the answer would be a little different. The current basis is 1. Therefore using the 5 month futures will effectively lock the rate applicable to the contract amount to 1.

The basis has been calculated using the rate for selling dollars. However you could have calculated the basis using the mid-market spot instead, in which case you would get the current basis as 0. And is it ok to use the 4month forward rate as the spot rate at month 4 stating the assumption ofcourse to calculate the basis risk?

With regard to your first sentence, the profit or loss on the futures is the difference between the current price of the futures and the price of the future on the date of the transaction. Which is buy and which is sell depends on whether you are hedging against a receipt or a payment of the foreign currency. The basis is the difference between the spot rate and the future price.

We can estimate it by looking at the current basis difference between the current spot and the current futures price and assuming that it falls linearly over the life of the future. We do not need the future spot rate to be able to estimate the basis. Of course there is basis risk! However it is not necessary to calculate it in this example because the question actually tells you the spot rate and the futures price on the date of the transaction.

That is all we need. If we are not given the futures price on the date of the transaction then we need to calculate the basis risk. See the next lecture! You must be logged in to post a comment. Comments I have problems with the adding and subtracting of remaining basis risk in the furture rate of the closing date. Log in to Reply. Hello John, Well, am bit confused between eg 8 and 9 spot rate. Hy john sir, In the question Polytot from Bpp to calculate the number of contracts a lock in rate is used because the transaction took place in november and the futures rate of december was given.

Sorry — the numbers are correct, but the dates are typed wrongly.

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