heres the kaplan question:
Calculate the total rate of return that Wulf can expect from hedging the principal amount in the British denominated asset with currency futures. Assume that Bauer hedges the principal by selling £5,000,000 in pound futures at £0.79/€ and the value of the investment is £5,100,000. When this hedge is lifted the futures rate is £0.785/€ and the spot rate is £0.75/€.
the payoff is apparently futures price - futures rate when hedge is lifted.
If you sold pounds forward at a predetermined rate - why would you not compare it to the current fx spot rate? I don’t understand how forward rates and spot rates don’t converge to the same price upon expiration.
Because you would be comparing apples to oranges. Comparing the futures price to spot price when valuing a contract doesn’t make sense. To value a contract it must be done at ONE time. Thus, your original contract futures price is still in future at time N - to value contract you must compare new futures price at time N, to original contract futures price at same time N, then discount back to present
doesnt a future’s contract at maturity equal spot price? if there is no time left in the contract there is no time value and spot/futures price should be equivalent?
i didn’t read anything about “maturity”, just the hedge being lifted. i assumed the trader simply exited the position early. if it was at maturity, then yes the spot price would be the relevant benchmark.
Your right. I read the case as though he had purchased a forward that matured the same date. thank you. I spent far too much time reading this over and over. Little details are what kill my score!! AHHHHH