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August 8, 2020 at 2:29 pm
Hi John, can I just say I love your lectures they explain everything so well! One thing that strikes me is that when dealing with the futures we will be receiving these monies when we close the contract which is at the start of the loan and therefore have the receipt sat in our bank account before loan interest is due in 6 months time, theoretically wouldn’t this be invested/used to pay off overdraft for example up until the date that the monies would be due and therefore an additional saving on interest/receipt from deposit can be achieved? why would we not factor this in? or have I missed something?
John Moffat says
August 8, 2020 at 3:24 pm
You are right in that there is a timing element here, but we ignore it for the exam 🙂
August 6, 2020 at 3:56 am
Hi Sir, when we calculating the futures price for 1 Jan, the futures price on 1 JAN will be lower than the Interest rate (94.00) on 1 JAN because of the futures price on 1 NOV is lower than the interest rate (91.00) on 1 NOV.
Is it this theory applicable to the currency futures as well? i am not sure when to deduct or when to add the unexpired basis risk.
August 6, 2020 at 8:39 am
Yes, it is applicable to currency futures. The spot rate and the futures price always move closer together over time, but whichever is higher ‘now’ will always be higher.
August 6, 2020 at 11:23 am
August 6, 2020 at 2:40 pm
You are welcome 🙂
October 26, 2019 at 7:03 pm
Hi John, For my understanding please, are the rates under a futures the actual rate we would be locking in to borrow at, or are they just locking in a future base rate (on top of which the bank would add our risk spread, here 1%)? I realise we are only using futures here to hedge the risk and not to actually borrow at the futures specified rate, but I’m curious if I understand.So if we wished to use the January futures and take out a loan at the end of January, would the 6.5% (Price 93.5) be the total interest rate or would it only replace LIBOR as the base rate, with a further risk-spread added by the bank (here, 1%). Many thanks.
October 27, 2019 at 8:17 am
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.
October 27, 2019 at 2:44 pm
Brilliant John. Helps me understand the basis calculation here better i.e. LIBOR/spot rate vs future’s rate. Thanks a mil.
October 11, 2019 at 7:29 am
Hello John. Since the loan is to start in 2 months, 1 Nov – 1 Jan. shouldn’t the interest be calculated for two months on the future? so rather than dividing by 400, shouldn’t it be (93.5-90.83)/100*2/12?
so in order to hedge it more accurately, i tried with 120m (40*6/2) as future contract size since it is only for 2 months and we should be getting the equivalent amount of interest within 2 months. but still, i got the same answer as you did, effective interest as 7.33%.
so i know your final answer still correct, but shouldn’t we taking future contract size 120m rather than 80m?
October 11, 2019 at 7:41 am
Interest is calculated for the period of the loan. There is no interest between now and the date the loan starts because you are not owing anything during that period!!
August 24, 2019 at 4:29 am
Hello John, Is there a premium charged on futures?
August 24, 2019 at 10:49 am
No – no premium 🙂
June 2, 2019 at 2:30 am
Can you advice: You have used the price of the futures as at January (93.5) to find the basis point on Nov 1st. If the Futures date was March, would you have used 93.35 against 94 to calculate the basis?
June 2, 2019 at 11:03 am
93.50 is the price of January futures as at 1 November (not as at January!)
If March futures had been used then we would have taken 93.35 against 94.
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