Hello, what amount of contracts to use if the loan term is over 1 year? For example, for 4 years loan, i doubt we calculate as “Loan*48/3”? To what extent we can hedge long terms?

But I explain this in the lectures (and I can actually see it written on the screen above in red before I even play the lecture) !!!!

We divide by 100 because it is an annual %’age, and we divide by 4 because they are always 3 months futures and there are 4 lots of 3 months in a year.

Thank you for the great lecture. Sorry I must ask a very daft question which has been bothering me for some time now.

Interest rate are quoted as a whole number of 100 so 10% will be an interest charge on loan and 90 will be futures price. My question is what 90 would be representation of? In my understanding, the interest rate on the loan was calculated based on the prevailing rate of 10%.

To enable futures to be bought and sold in the same way as shares are bought and sold, the interest rate is simply converted into a number in the way you have stated.

Firstly, thank you for your excellent lecture about the interest rate futures. There is a question about calculating the effective interest rate quickly. Should we still use the formula “Effective rate = Opening INTEREST futures’ rate – closing basis” to get the outcome quickly? I noticed that the outcome applied is similar to the correct answer used in the general method. (Just like the method we used in CURRENCY futures to hedge)

I am not sure what you mean by the ‘general method’ because the method is exactly the same as the method we use for currency futures if we are not told the exchange rate on the date of the transaction (which is usually the case in the exam these days).

What you refer to as the effective rate is calculating the net effect of borrowing/investing at the actual interest rate at the start of the loan/deposit together with the gain or loss on the futures. This is the method that we almost always use these days in the exam – we only use the other way if the question tells us what the interest rate is at the start of the loan/deposit, which is rare these days.

For example 3, why do we close the futures deal when the loan actually starts? Since interest is paid at the end of a loan, shouldn’t we buy futures that we can hold until the loan matures, and that’s when we make a profit or loss?

Thanks again for another great lecture. How does the dealers make money from future if the borrower is protecting them self is there a premium charged ? and if there is a premium charged why we did not take into account like IRG

Don’t forget that if you buy a future and the price goes up, then you make a profit and the dealer loses, but if you buy a future and the price goes down, then you make a loss and the dealer gains.

Slacher says

Hello, what amount of contracts to use if the loan term is over 1 year? For example, for 4 years loan, i doubt we calculate as “Loan*48/3”?

To what extent we can hedge long terms?

John Moffat says

In theory you could use futures (and it would be the amount of the loan x 48/3), but that certainly will not be the case in the exam.

However for long-term hedging we would use swaps.

naqvifreya says

why did you divide it with 400 for calculating the gain on futures?

John Moffat says

But I explain this in the lectures (and I can actually see it written on the screen above in red before I even play the lecture) !!!!

We divide by 100 because it is an annual %’age, and we divide by 4 because they are always 3 months futures and there are 4 lots of 3 months in a year.

meenaljain says

Hi john thanks for the lecture

meenaljain says

Hi i just wanted to know the concept of effective interest rate. could you pls let me know

daivaa says

Thank you for the great lecture.

Sorry I must ask a very daft question which has been bothering me for some time now.

Interest rate are quoted as a whole number of 100 so 10% will be an interest charge on loan and 90 will be futures price. My question is what 90 would be representation of?

In my understanding, the interest rate on the loan was calculated based on the prevailing rate of 10%.

Please delete this query if it’s inappropriate.

Thank you in advance.

John Moffat says

To enable futures to be bought and sold in the same way as shares are bought and sold, the interest rate is simply converted into a number in the way you have stated.

apengchao says

Hi, John Moffat

Firstly, thank you for your excellent lecture about the interest rate futures. There is a question about calculating the effective interest rate quickly. Should we still use the formula “Effective rate = Opening INTEREST futures’ rate – closing basis” to get the outcome quickly? I noticed that the outcome applied is similar to the correct answer used in the general method. (Just like the method we used in CURRENCY futures to hedge)

Best regards,

Chao Peng

John Moffat says

I am not sure what you mean by the ‘general method’ because the method is exactly the same as the method we use for currency futures if we are not told the exchange rate on the date of the transaction (which is usually the case in the exam these days).

What you refer to as the effective rate is calculating the net effect of borrowing/investing at the actual interest rate at the start of the loan/deposit together with the gain or loss on the futures. This is the method that we almost always use these days in the exam – we only use the other way if the question tells us what the interest rate is at the start of the loan/deposit, which is rare these days.

wasimomarshah says

Sorry if this is a dumb question.

For example 3, why do we close the futures deal when the loan actually starts? Since interest is paid at the end of a loan, shouldn’t we buy futures that we can hold until the loan matures, and that’s when we make a profit or loss?

John Moffat says

It is at the start of the loan that the interest rate is fixed.

So the risk we are hedging against is the risk of the interest rate changing between ‘now’ and the date the loan starts.

imanyuaud says

Hi,

Thanks again for another great lecture. How does the dealers make money from future if the borrower is protecting them self is there a premium charged ? and if there is a premium charged why we did not take into account like IRG

Regards

John Moffat says

There is no premium charged for futures.

Don’t forget that if you buy a future and the price goes up, then you make a profit and the dealer loses, but if you buy a future and the price goes down, then you make a loss and the dealer gains.