I have not been entirely sure what the mechanism and the real reason behind the movements (interest up and futures down and vice versa). It might have been mentioned in the lecture – sorry if I missed it. But I have found a clear explanation:

“Effect of Interest Income The futures price decreases when there is a known interest income because the long side buying the futures does not own the asset and, thus, loses the interest benefit. Otherwise, the buyer would get interest if he or she owned the asset.”

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OnyinyeOfor says

Thank you Mr John for your lectures. Your explanations drives the point home

accountant-@100 says

this is great lecture

sohan1992 says

Love the way you explain with practical examples, and always have an answer for WHY

Janos says

Hi,

I have not been entirely sure what the mechanism and the real reason behind the movements (interest up and futures down and vice versa). It might have been mentioned in the lecture – sorry if I missed it. But I have found a clear explanation:

“Effect of Interest Income

The futures price decreases when there is a known interest income because the long side buying the futures does not own the asset and, thus, loses the interest benefit. Otherwise, the buyer would get interest if he or she owned the asset.”

John Moffat says

It is the missing figure.

If they did their own borrowing they would be paying 10%.

Swapping gives a saving of 1/2 x 1.5% = 0.75%.

Therefore the settling up must end up with X paying 10 – 0.75 = 9.25%

Swapping means they will be paying 12%, so they settle up by Y paying X 9.25% which means X ends up paying 12 – 9.25 = 2.75%.

Remember, however, that as I say in the lectures you cannot be asked to do this calculation in Paper FM – only to explain the idea behind swapping.

njivan28 says

hello,how did you get that 2.75 y pay to x from?