[vaggelis85]

Thank you very much sir for your reply and all the help that you provide us.

Have a great weekend!

[vaggelis85]

Hello Mr John,

I would like to aologise in advance for the big post but I am really confused with this.

I have a question on futures. I asked you yesterday in regards to question Lirio Co whether we need to add or subtract the unexpired basis from the futures price. You said that the closing rate should be between the spot rate and the current futures rate as the basis reduces to zero. If we see the answer in Casasophia the solution says.

Future rate: 1.3698
Spot rate: 1.3618
So basis now is 0.0080
We have 1/5 unexpired basis so 1/5 * 0.0080=0.0016

If we apply the rule that the spot and the futures rate must get closer we should deduct this amount from the futures price to get 1.3698-0.0016= 1.3682

Then we buy at the futures rate of 1.3698
We sell at 1.3682
So we have a loss of 0.0016

We have 117 contracts so 117×125000×0.0016/1.3698=17082 euros loss.

The answer says instead that since futures rate – Spot rate is positive (0.0080) we need to add the 1/5×0.0080=0.0016 to the futyres rate so that 1.3698+0.0016=1.3714

In this way we have a profit of 17k

If we do it like this then the rates do not converge.

What is the correct way? Should they converge or when the futures rate minus the spot gives a positive we add to the futures rate and when futures rate minus spot rate is negative we deduct?

Thank you very much for your help and apologies again for the big post.

[vaggelis85]

Hello Mr John

I have a question in regards to the basis. In all the questions we calculate the basis as Futures rate – Spot rate. This is what we did here as well. 0.8656-0.8632= 0.0024. As you also said above we have 1 month unexpired, so 1/4*0.0024=0.0006

The rule that the bpp book has is that if this is positive as it is above we add it to the futures rate. If it is negative we deduct it. Here it is positive 0.0006. Why do we need to deduct it from the futures rate?

Could you please help me?

Thank you very much! ! !

[vaggelis85]

Hello

Thank you for your reply. Does this mean that for new bonds the market value will be equal to the book value?

[vaggelis85]

Hello

Could you please explain me why in part b the MV of debt is 2400m? In part a of the question we calculated the MV of debt. Why don’t we use the same method for the new bond as well?

Thank you

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