- This topic has 3 replies, 2 voices, and was last updated 7 years ago by
.
- Posts
Hi Sir,
I don’t really understand about this:
the LIBOR decreased by 0.5% to 2.8%, the June future price suppose to be increased as 97.38 (97.2+0.18), but the model answer showing that the future price decreased as 97.02 (97.2-0.18).From what I understand that as a borrower, when the interest rate decreased the future price increased. As lender, when the interest rate increased the future price will be decreased.
Thanks.
You are confusing two things.
Firstly if the interest rate falls then the futures price increases, and vice versa (it is irrelevant whether a borrower or a lender).
Secondly, the 0.18 is the basis, and since the current futures price is below the equivalent current interest rate, it will always be below the equivalent interest rate. Again, this has nothing to do with whether they are a borrower or a lender. (Had the current futures price been above the equivalent current interest rate, then it would always be able and so you would add the 0.18).
It may help you to watch my free lectures on interest rate risk management.
So forgetting about the borrower or lender, since the interest rate is decreased the future price is not increased?
(When LIBOR decreased by 0.5%)Thanks for the previous reply.
- You must be logged in to reply to this topic.