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Hi John,
The question told that basis is 0.22 as of 1 February. How should I know whether one should add or deduct this:
Futures price=100-interest-basis
Or 100-interest+basis?Answer states it should be deducted.
So, It should be deducted for any interest rate options? Am I correct?Thank you in advance.
It could be either way. The way to decide is that the current interest equivalent price and the current futures price get closer together. So it is whichever way makes them closer together.
So if libor is currently 5% (say) which is equivalent to 95.00
and if the current futures price is (say) 96.00Then the figure you are after will be between 95.00 and 96.00
So, in case of.Q2 2014, we are forced to assume: we’re given with strike price per option which is NOT the futures price and pure basis for some dates. We have no any prices of futures. Thus, we can either add or deduct basis. Am I correct?
Thank you in advance.
What you say is perfectly correct, and it was poor of the examiner. The change in the basis is certainly correct, but as to whether it means the futures price is more or less is simply an assumption. You would have to be given full marks if you added the 0.22 instead of subtracted.
I am going to write to the examiner about this.
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