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Dear John Sir,
Sir I am curious to understand the logic/rational behind the following formula used to calculate no.of future contracts to be bought(in the context of interest rate futures):
loan amount x loan duration/ (contract size x contract duration)
many thanks!
But I spend time explaining the calculation of the number of contracts, and the reasoning, in my lectures (and there is certainly no need to learn it as a formula).
The futures in the exam are always 3 month futures and so to protect against the risk we need to adjust the amount that we hedge. (E.g. if the loan will be for 6 months then we need to hedge 6/3 x the amount of the loan).
Futures have to be dealt in fixed size contracts, so to get the number of contracts we need to divide the amount being hedged by the contract size.
Please watch the lectures because, again, this is all explained with examples.
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