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  1. Hi John,

    I have the same question:
    is the effective rate = lock-in rate? are they same stuff with different name or totally different concepts?

    Because libor rate is bigger than future rate, so lock-in rate= 6%+1%-0.33%=6.67%
    alternatively calculation, future price 93.5=interest rate 6.5%+0.17%=6.67%. Both way are same answer but different with effective rate 7.33%.

    Can you please kindly explain to me, thanks.

  2. Hi John,

    Isn’t effective interest rate the same as lock-in-rate?

    The formula for lock-in-rate says = 100 – (current futures price + unexpired basis on transaction date). In this case, lock-in-rate = 100 – (93.5 + 0.17) = 6.33% which is different from 7.33%.

  4. Hello John

    I tried with Libor 10%. And these are the results Ive calulated
    Futures price on 01/01 = 89.93
    Profit on futures deal = £0.84m
    net pmt = £1.36m
    which gives me an effective int rate or (1,36m*12/6)/40m= 6,8%. and not 7,3%
    Could you please advise?

    Thank you

    • If LIBOR rises to 10% then the futures price on 1 January will be 90 – 0.17 = 89.83.
      So the profit on the futures deal will be 40M x 6/3 x (93.50 – 89.83) x 1/400 = 0.734
      So the net payment with be (40 x (10%+1%) x 6/12) – 0.734 = 1.468M
      So the effective interest rate = 1.468/40 x 12/6 = 7.33%

      • Hi John,

        Isn’t effective interest rate the same as lock-in-rate?

        The formula for lock-in-rate says = 100 – (current futures price + unexpired basis on transaction date). In this case, lock-in-rate = 100 – (93.5 + 0.17) = 6.33% which is different from 7.33%.

  8. Hi John,

    To add to the growing list of questions on lock-in rates and effective rates relating to the above lecture…

    Firstly, could you please confirm if these are the same?

    Secondly, in you used the expired basis (0.5-0.17 = 0.33) and added that to the LIBOR + premium (6% + 1%) to give you 7.33%.

    In the current Kaplan Exam Kit for Q62 however they use the remaining basis and deduct it from the futures rate.
    Applying that logic to the above example that would give us 93.5 – 0.17 = 93.33 or 6.67%.

    Are the two ways of calculating lock in rates, and if so why do they give different answers?

    thank you very much.

    (This is my very last paper – thank you to you and everybody at OT for all your efforts in helping me get through all the previous 13 already.)

    • I cannot comment on the particular Kaplan question because I only have the BPP revision kit.
      However, the lock-in rate must be between the current futures price and the current libor equivalent.
      So the alternative way of getting it here is to take the current futures price and add the remaining basis (because the equivalent LIBOR is more than the current futures price).
      This gives 93.5 + 0.17 = 93.67 or 6.33%. To that of course we have to add the premium always payable which is 1%. Again it is 7.33%

  9. Can you please explain that if we use this lock in rate as the final calculations it will be good and enough for getting marks in the exam? as if the simple requirement is to calculate effective interest rate then we could use this simple Lock-In-Rate method to find the effective interest rate.

    • On the date of the transaction, we calculate the interest at what the rate is on that date, and calculate the profit or loss on the futures.

      Because we are able to estimate the basis risk, we can calculate an effective interest rate on the date of the transaction that give the net effect (of using the actual rate and adding or subtracting the profit/loss on the futures). This is called the lock-in rate.

      If the tick value is given, then you can use this to calculate the profit or loss on futures, but you do not actually need to use it – you can calculate the profit or loss in the normal way (it will give the same result). I never bother using ticks 🙂

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