afm march/june 2019 sample questions.

The current LIBOR is 4.5% which is equivalent to 95.5.
The current September futures price is 95.05, and therefore the current basis is 95.5 – 95.05 = 0.45.

‘Now’ is 1 May and therefore there are 5 months to the end of the September future.
The borrowing is on 1 September which is 4 months from ‘now’.

Therefore on 1 September the basis will have fallen to 1/5 x 0.45 = 0.09.

If LIBOR increases by 0.6% it will be 5.1% which is equivalent to 94.9.
Therefore the futures price will be 94.9 – 0.09 = 94.81 (assuming of course, as we always do assume, that the basis falls linearly to zero over the life of the future. In practice this might not be the case.)

I do explain all this in detail, with examples, in my free lectures on interest rate risk management.

95.35 is the price at which they are able to exercise the options if they choose to do so.

If they do choose to exercise then they will sell futures (because they are put options) at 95.35 and will therefore have to buy futures at whatever the price happens to be on that date.

The exercise price of the options is of no relevance whatsoever in determining the price of the futures on that date.

I suggest that you watch my free lectures on interest rate futures and on options where I explain how they both work.

You are welcome 🙂