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Hedging foreign exchange risk
6.4 Forecasting futures prices using ‘basis’
An understanding of 'basis' enables us to estimate the likely closing
futures price on the transaction date.
Basis = Spot rate – futures price
The level of 'unexpired basis' can be estimated on the transaction date
by assuming that the basis reduces from its opening value to zero in a
linear manner.
6.5 Basis workings
Transaction Futures expiry
Now
date date
Spot rate KNOWN
The same rate!
Futures price KNOWN
‘Unexpired basis’
Basis Easy to calculate ZERO
can be estimated
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