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If we choose not to exercise our put option to sell interest rate futures, can we still make a gain if the expected spot rate is higher than the expected futures price?
For example if we buy interest rate futures (put options) with a strike price of 96.00 for March and the spot rate turns out to be 96.50 in March, I understand that we would ignore our option in this case.
However if we expect interest rate futures to be worth 96.45 in March, I don’t understand why we couldn’t sell at the expected spot rate of 96.50 and make a gain of 0.05 on each future. I think I’m missing something in my understanding.
I think my question is – if we choose not to exercise our option on interest rate futures, is there ever a potential gain still to be realized?
Thank you for your lectures, they have been a great help and I will be reviewing the lectures on this topic as soon as I can. I can calculate the effective exchange rate correctly however I don’t understand why we don’t take this extra step (and I’m fully aware I’m probably missing something obvious).
Nevermind I think I’ve got it – for some reason I was thinking about buying futures on the transaction date for the futures price (96.45) and selling them for the “what if LIBOR increased” spot rate on that date (96.50) which obviously you can’t do. You would be buying and selling futures for 96.45 therefore making no gain and therefore there’s no point.
Thanks again for your lectures and all the support you give us students.
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