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Sam
Please, I am looking at June 2015 Q.4(a). Daikon
Its asking to calculate interest rate futures, options and collar on the options..1. Why is it that in calculating the unexpired basis, it used 2 months (ie. 11 months’ time to December) instead of 1 month because it said full repayment will by in 11 months’ time.
2. In calculating interest rate futures, it did not calculate the interest to be paid. It also calculated additional cost. Where is additional cost coming from?
3. Is it only asking for the additional cost and not the actual interest paid as well?
Thank you
1. Futures deals start ‘now’ and finish on the day the loan starts.
The loan starts in 5 months time. December futures finish in 7 months time.
Therefore there are 2 months unexpired.I do suggest you watch my free lectures on interest rate risk management.
2. The answer does calculate the interest to be paid (867,000). The net additional cost is the extra interest (136,000) less the gain on the futures (68,000)
3. The third sentence of the question says that they are interested in the extra/additional cost.
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Thank you sir. I am most grateful
for part (a), why is the net additional cost calculated? i can’t seem to find any specific requirements for it… can i calculate the net payment and effective annual interest rate for each hedging method instead?
I’ve found the requirement. Please ignore the question i’ve just asked. Thank you 🙂
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