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May 15, 2016 at 10:40 am
I tried with Libor 10%. And these are the results Ive calulated
Futures price on 01/01 = 89.93
Profit on futures deal = £0.84m
net pmt = £1.36m
which gives me an effective int rate or (1,36m*12/6)/40m= 6,8%. and not 7,3%
Could you please advise?
John Moffat says
May 15, 2016 at 1:57 pm
If LIBOR rises to 10% then the futures price on 1 January will be 90 – 0.17 = 89.83.
So the profit on the futures deal will be 40M x 6/3 x (93.50 – 89.83) x 1/400 = 0.734
So the net payment with be (40 x (10%+1%) x 6/12) – 0.734 = 1.468M
So the effective interest rate = 1.468/40 x 12/6 = 7.33%
May 14, 2016 at 6:42 pm
May 15, 2016 at 8:08 am
Thank you 🙂
May 9, 2016 at 3:57 pm
well explained… thanks alot
May 9, 2016 at 6:08 pm
You are welcome 🙂
April 14, 2016 at 4:42 pm
One of the Best lecturer i’ve ever seen 😀 Thank You Sir 😀
April 14, 2016 at 7:23 pm
You are welcome, and thank you for the comment 🙂
April 13, 2016 at 9:43 pm
To add to the growing list of questions on lock-in rates and effective rates relating to the above lecture…
Firstly, could you please confirm if these are the same?
Secondly, in you used the expired basis (0.5-0.17 = 0.33) and added that to the LIBOR + premium (6% + 1%) to give you 7.33%.
In the current Kaplan Exam Kit for Q62 however they use the remaining basis and deduct it from the futures rate.
Applying that logic to the above example that would give us 93.5 – 0.17 = 93.33 or 6.67%.
Are the two ways of calculating lock in rates, and if so why do they give different answers?
thank you very much.
(This is my very last paper – thank you to you and everybody at OT for all your efforts in helping me get through all the previous 13 already.)
April 14, 2016 at 7:54 am
I cannot comment on the particular Kaplan question because I only have the BPP revision kit.
However, the lock-in rate must be between the current futures price and the current libor equivalent.
So the alternative way of getting it here is to take the current futures price and add the remaining basis (because the equivalent LIBOR is more than the current futures price).
This gives 93.5 + 0.17 = 93.67 or 6.33%. To that of course we have to add the premium always payable which is 1%. Again it is 7.33%
April 14, 2016 at 8:33 pm
Thanks John – I get that now.
Lightbulb moment! 🙂 may there be many more.
April 15, 2016 at 6:52 am
Muhammad Majid says
March 5, 2016 at 4:36 pm
Can you please explain that if we use this lock in rate as the final calculations it will be good and enough for getting marks in the exam? as if the simple requirement is to calculate effective interest rate then we could use this simple Lock-In-Rate method to find the effective interest rate.
March 5, 2016 at 5:33 pm
It will be sufficient for the exam unless (obviously) the question specifically asks you to show exactly what happens on the date the loan starts and the futures deal is closed.
November 5, 2015 at 11:33 pm
Very useful lecture. But just a quick one, do we always add the expired basis and add to Libor at start in estimating the lock-in rate?
November 6, 2015 at 5:34 am
The lock in rate is always between the current future price and the current libor, and that determines whether you add or subtract.
November 6, 2015 at 8:36 am
Thanks but can u elaborate a little further please
November 6, 2015 at 5:42 pm
As the basis decreases, LIBOR and the futures price will get closer together.
September 20, 2015 at 9:53 pm
Hi, It is very good lectures and helps me a lot! I didn’t understand it when I took part in the exam in F9 and fully understood and will have confidence to pass it once!
October 11, 2014 at 6:39 pm
Thanks for the lecture. Please explain what is lock in rate and we would use it. Also if tick value is given do we use this to calculate profit and loss?
October 12, 2014 at 10:19 am
On the date of the transaction, we calculate the interest at what the rate is on that date, and calculate the profit or loss on the futures.
Because we are able to estimate the basis risk, we can calculate an effective interest rate on the date of the transaction that give the net effect (of using the actual rate and adding or subtracting the profit/loss on the futures). This is called the lock-in rate.
If the tick value is given, then you can use this to calculate the profit or loss on futures, but you do not actually need to use it – you can calculate the profit or loss in the normal way (it will give the same result). I never bother using ticks 🙂
August 2, 2014 at 5:32 pm
very nice lecture God bless you.
August 2, 2014 at 7:04 pm
May 19, 2014 at 2:50 am
Very good way of teaching. Wonderful lectures, easy to understand. It clarifies my confusions about very difficult topic about derivatives. God bless you.
October 28, 2013 at 7:51 am
Can I ask how to calucate the profit or loss on the interest rate future when there’s a tick value involved? thanks.
October 28, 2013 at 4:17 pm
You never actually need to use ticks.
However, if you want to use them then you calculate the difference between the buy and sell prices in numbers of ticks (a tick is 0.01), multiply by the numbers of contracts, and then multiply by the tick value.
October 29, 2013 at 3:19 am
Thanks for making a point, clarifing a lot.
October 29, 2013 at 7:26 am
August 19, 2013 at 9:25 am
very nice lecture. God bless
September 27, 2012 at 2:03 pm
June 5, 2012 at 6:35 am
Thanks a lot!
December 3, 2011 at 6:31 am
Very good lectures!!!. Thank you very much!!!
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