1. avatar says

    Nice Lecture! Thx for efforts OT. I have one quick Q on this, probably a dump one. As per the lecture the interest rate futures are for 3 months and when the time period of the loan is more then 3 months, take appropriate value of loan ( i.e. for a 6 month loan take double the value ). But, what if the period of gap between the current date & the date the loan starts is more then 3 months. Lets say, today is 1st Jan and a 6 month loan starts on 1st July. So we have a uncovered period of 6 months ( Jan – Jun ), how do we cover this period with a 3 month futures ( which effectively need to be closed with in the next 3 months? ).

    • Profile photo of John Moffat says

      Three month futures do not have to be closed after three months – the three months simply refers to how profits or losses are calculated.
      March futures must finish but the end of March; June futures by the end of June; sept futures by end Sept, and Dec futures by end Dec.
      There are always the four to choose from which means you can deal with a loan starting up to a year away.

  2. avatar says

    Dear tutor,
    In the practice Q9 Toytown part ( b):
    Can you please explain the 86.25 ? Does it mean that today the price of the futures is 86.25??
    I uderstood that .
    Then i added a 2% increase to that which gave me 87.98. I used these two figures to calculate the profit
    By doing : 10m * (87.98-86.25/400) which gave me 4325.
    I do not quite understand the ticks.
    Please explain this to me with the ticks its really hard to udrstand

    • Profile photo of John Moffat says

      86.25 is the price at which the futures are currently priced – that means that it is todays price.

      Why did you increase the futures price? If interest rates increase, then the futures price falls. Also, the futures prices is effectively a percent (86.25 is equivalent to 3.75%) so a movement of 2% gives rise to a futures price of 84.25.

      With regard to ticks – a tick is the smallest movement in the futures price, which is 0.01. However you never need to use ticks in the exam (or in this question) (but they are explained in the lecture).

    • avatar says

      Another thing is that in part (c) it clearly says in the q that the company is taking an IRG of 14%.
      So refering to the requirements its asking you to calculate the effect of the IRG at 14% if the interest rates goes up by :
      (i) 2 %
      (ii) same thing
      (iii) goes down by 1%
      In you answers you took 14% itself when calculatung the actual cost, I do not understand why??
      I took 16% as being the actual rate then claimed at 14%.
      Please help

      • Profile photo of John Moffat says

        The question does not ask you to show how IRG’s work – it clearly only asks whether it will be more or less expensive, and so all that you need is to calculate the total cost.

        If the actual interest is 16%, then OK you pay 16% and then claim back 2% on the IRG, but the net cost will be 14% as a result.
        With an IRG the maximum interest will effectively be 14%, but if the actual interest rate is lower then you pay the lower rate and do not claim on the IRG.

  3. Profile photo of deepmaharaj says

    Very Good Lecture. God bless. When coaching prices of renowned online classes such as Kaplan -LBS have been so high by making available such a quality stuff at free of cost indeed need kudos. Keep it up.

  4. avatar says

    What if we calculate the profit like this: 6,000,000 pounds x 0.02 x (6/12) = 60,000
    Logic: We bought the futures for the same amount of loan then multiply it with profit and as the profit is yearly so we multiply it with (6/12) as the loan is for 6 months and so the profit should match the additional expense of interest of 6 months.
    Does this makes sense?

    • Profile photo of hssniqbl says

      Well your method is much harder than the tutors method. What if you cant get the exact amount of futures? Your method is just going to be confusing plus its logic is also not sound.

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