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Hello Sir,
I hope you are doing good, Please help me understand why do we take LIBOR rate to calculate futures price and not the actual interest rate after considering credit risk?
Furthermore please give me clarity regarding this comment of yours ”If the loan were to be taken on the closing date for the futures (in your example, January) then the 6.5% would replace LIBOR and the actual interest payable would be higher due to the credit risk applicable to the company.”
Does this mean that if the date of our transaction and the futures settlement was same then LIBOR would be a rate that gives us the same futures price as in the question?
Futures prices change with the general rate of interest (i.e. LIBOR) and not with the interest rate applicable to one particular company.
Have you watched the lectures working through each of the chapters in the notes (because there is no point in using the notes on their own – they are not a Study Text and it in the lectures that I explain and expand on the notes.)
Yes I have watched the lectures and made my own lecture notes, seems like I missed this point then. And I found that comment under the lectures comment section.
Thank you for the clarification.
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