Page 199 - AFM Integrated Workbook STUDENT S18-J19
P. 199
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
187
