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Hi John,
48m deposit:
Awan deposits at 4.09% less 20 basis points = 3.89%
If rates increase by 0.9% (4.79%) we are receiving interest of 766.4
We have locked in a rate of 4.82% which fixes interest receivable of 771.2
We leave the deposit at risk, so we received 766.4 but our agreement yields 771.2 – why are the bank not paying us the difference of 4.8?
The solution calculates a payment to the bank of 27.2k – I can see how this is calculated but why are the 20 basis points not being taken into account when calculating the gain/loss?
Thanks
The question is a little bit unfair in that it is effectively assuming that the FRA rate offered is the rate before the reduction of 20 basis points. It did not make this clear and so you would not have lost marks (even though the final answer is obviously different).
The solution calculates basis of 0.46 based on initial inter-bank rate of 4.09%
The same basis of 0.46 was used when the interest rate went up/down by 0.9%
Basis when rate went up: (0.95.01-94.76) = 0.25
Unexpired basis (0.25*2/5) = 0.1(100-4.99) 95.01-0.1 = 94.91
(94.76-94.91)/400*(32*2m) = 24,000 loss
deposit at risk (48m*4.79%*4/12) = 766,400 – 24000 = 742,400
effective (742,400/48m)*12/4 = 4.6%
Loss in 33,600. If i had used the new basis of 0.25 – would I still get the full credit?
In addition, the options calc:
Where is the 94.55 coming from? Why is it not 94.81
I am getting 94.81 from:
100-4.99 = 95.01 – 94.5 (stike price) = basis of 0.51 creating an unexpired basis of 0.2
Futures price = 95.01-0.2 = 94.81 !!!
this question is terrible or has my mind just gone blank!!
The current interbank rate is 4.09% which is equivalent to 100 – 4.09 = 95.91
Therefore the current basis is for the March futures is 95.91 – 94.76 = 1.15, and the unexpired basis on 1 June is 1.15 x 2/5 = 0.46The current basis is calculated using the current interest rate and the current futures price, and if the interest rate changes in the future then the futures price will also change, but the difference between the two on 1 June will be 0.46 whatever happens.
I don’t know whether or not you have watched my free lectures on interest rate futures, but if you have then it could be worth watching them again.
(Using the wrong basis would lose marks)
As far as the 94.55 is concerned, if the interest rate increases by 0.9% it goes to 4.99% which is equivalent to 100 – 4.99 = 95.01 on 1 June. The basis on 1 June is 0.46 (as above) and therefore the futures price on 1 June will be 95.01 – 0.46 = 94.55. It is the same calculation as when using futures, because the options are options to buy or sell futures.
Again, do please watch my free lectures on all of this.
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