Alecto D '11

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January 20, 2017 at 2:00 pm #368592
mansoor
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part (b) requires us to do futures, future options and collars.

i got the workings right surprizingly but i went wrong in the value of unused basis:

now: 1 Jan
loan start: 1 May
Futures available: June (it says to assume futures expire at end of month)

so, from 1 jan to 30 jun, makes 7 months.

since the loan start is 1 may, that makes 5 months, which leaves 2 months. so on 1 may we shd have 2/7.
the answer uses 2/6

can u pls explain.
January 20, 2017 at 2:16 pm #368593
John Moffat
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From 1 Jan to 1 May is 4 months (not 5 months).
From 1 Jan to 30 June is 6 months
From 1 May to 30 June is 2 months
January 20, 2017 at 2:54 pm #368602
mansoor
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lol….i always get these wrong….thank u….

this question also stated that we can assume that Alecto does not face any basis risk.

what does this mean? if there is no basis risk, then should we not ignore the basis??

thanks again in advance
January 20, 2017 at 4:52 pm #368612
John Moffat
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No – don’t ignore the change in the basis. The risk is that although we assume it falls linearly, in practice it does not need to fall linearly – that is why there is risk.
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