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Dear, Mr Moffat
If you could please open the technical article called, how to answer an interest rate risk management question
Narrowing down to interest rate futures calculations and then specifically narrowing down further to basis point which is 0.34.
Why is it being deducted. What determines that it needs to be deducted because sometimes it is added?
I thought when we are depositing funds. Basis are added and when we are borrowing, basis are deducted but that’s not obviously the case as in this example we are depositing funds.
If the current futures price is lower than the current interest rate expressed in futures terms, then it will always be lower.
Similarly if the current futures price is higher than the current interest rate expressed in future terms, then it will always be higher.
It is this that determines whether you add or subtract the basis.
Have you watched my free lectures on the management of interest rate risk?
No, studied from book, although I raced through your 2 relevant lectures to find the answer. May be this point was in some other lecture that I did not play. Although I do watch your entire lectures when I struggle a lot.
Somebody said just do the opposite. If basis are positive deduct them and if basis are negative add them in the relevant section of the answer. I tested this assertion and it came out true.
I think that’s what your answer is suggesting to right
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