Currecny hedge question, BSAS pm #44 **SPOILER

When calculating the G/L on the forward position in this problem, why dont you use the current spot rate? The answer for the gain on the forward is given as 125M/5.8265-125M/5.6140, where 5.8265 is the current rate on a 3 mo forward. It seems that the relevant rate would be the current spot, because the the old 3 mo forward has expired, no?

The forward that is expiring will converge to the spot rate of the underlying, no the rate of a new 3 month forward contract. The term structure of interest rates may be different going forward then it was at initiation of your initial forward.

That’s my point. If the forward converges to the spot (which is should if all this stuff we’ve been studying is correct!) then the spot rate is what you would use to calculate the G/L on that contract. That is not what BSAS uses in their answer though and I think I saw something similar in the CFAI problems.

It only hold if the term of the future was 3 months and we are now at t+3 months. If the term of the future was longer than 3 months then you have to use the current price of the SAME future or use the current spot and interest rates to figure out the current price of the future.

It was a 3 mo forward and the time is now t=3 mo. I guess they assume that it will be rolled, but its not stated in the question.

Shouldn’t matter. Can you post the question and change some numbers around?

Check the errata. Using the current spot rate of 5.7870 is an acceptable answer. However, both Schweser (page 214 book 4) and CFAi (page 268 v 5) use F(t) not S(t). I think the assumption is that you’ll roll the contract over so it’ll be valued against the new forward rate.


guys, the forward points thing really threw me off these questions, anybody else?