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Hi
Sorry don’t know which pilot paper the question is as in the BPP revision kit it refers to pilot paper (qn 58)
My question relates to the futures hedging interest rate risk
1) why did they multiply the loan value by 5/12
2) the predicted futures price at the time of closing if deal is 96.02 ie labor of 3.3+0.5-0.18-100. But I calculated it as 96.38 by saying 100-3.8 gives you 96.2 and subtract the basis of 0.18.
3) how do we know when we need to calculated the futures price at close date
4) if we use the tick value to calculate profit why do we not divide by the quarter
5) what is tick value and when should we use itThank you.
Have you watched my lecture on interest rate futures? (because all of your questions are dealt with there)
1) They are taking the loan for 5 months and therefore will be charged 5/12 of the annual interest rate
2) What you are saying is correct except that if you subtract 0.18 from 96.2, you get 96.02 (not 96.38)
3) When dealing with futures we always need the futures price at the date the loan starts (in order to calculate the profit or loss on the futures)
4) If you choose to use tick values then fine, but they are simply the profit or loss on one contract for 0.01 movement. In calculating them, they have already divided by 4.
5) See my answer to (4). You never actually need to use ticks – I never bother with them – but they give the same answer.
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Please, is there a video on the solution to Alecto Co?
No – sorry. But you can either get the answer from the ACCA website, or it should be in your Revision Kit.
If you compare the question Alecto and Awan Co(Dec 2013) the way they have worked out the Interest rate options is different. In Awan co the workings look much more detailed and complicated may be because of the numbers involved. Alecto looks simpler but I’m not sure how they arrived at the numbers.
Could you please explain in Alecto, how did they arrive at the exercise price of 4.0% and 3.5% and the June futures price of 3.98% and 2.98%?
Sorry I got those. The exercise price should be 100-96=4 and 100-96.5=3.5. The futures price should be 100-96.02=3.98 and 100-97.02=2.98
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