Why automatic rollover of futures?

CFA Level III
#1

When computing the fully hedged return:

“The loss on the futures contract in euros = (5,000,000)(1.02−1.15) = −€650,000” Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons (P&T), 6/18/2012. page(299) 1.15 is the futures price and 1.1 is the spot price. The manager was short a contract to deliver dollars at 1.02 euros/. Now if I was the manager, I would buy in the spot market at eu 1.1/, not offset my losing contract with another futures contract at eu 1.15/. So why does CFAI text assume that he will always do that? See formula on p. 271 - “On the other hand, the realized gain on the futures contract sale is $100,000, as follows: Realized gain =V0 (− Ft + F0 ) (2)” Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons (P&T), 6/18/2012. page(271). I’d think it’s the bigger of V0(-Ft+F0) and V0(-St+F0). What am I missing?

#2

you have a futures contract – and that would be marked to market no matter what, over time each day.

In this calculation - you are assuming the contract was entered into on Day 0 at F0 and settled on Day t with Ft.

but actually (internally) it is a daily settlement - and this number is the final total #.

#3

Thanks CPK,

I guess I can only use St (spot) if Ft (futures price) is not given? e.g. in example 7B CFAI text ignores the profit/loss for the future contract itself, and no information is given regarding the March $/eu contract.

“Hedged portfolio value, using forward contract $1.5 per pound: $15,000,000 $1.5 per pound = £10,000,000” Institute, CFA. Level III 2013 Volume 5 Alternative Investments, Risk Management, and the Application of Derivatives. John Wiley & Sons (P&T), 6/18/2012. page(301).

Overall, thanks very much for all your contributions on this forum!

#4

Ah, never mind, forward vs future. No daily settlement.

Damn that’s a subtle point.