• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Basis risk on interest rates

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA AFM Exams › Basis risk on interest rates

  • This topic has 8 replies, 3 voices, and was last updated 8 years ago by John Moffat.
Viewing 9 posts - 1 through 9 (of 9 total)
  • Author
    Posts
  • October 13, 2012 at 1:38 pm #19170
    harripool
    Member
    • Topics: 13
    • Replies: 33
    • ☆

    Hi John,

    Hoping you can explain something for me? I have the Kaplan study text and the illustration makes no sense to me!
    (FYI – It is the basis calculation illustration on page 503)

    Using June interest rate futures to cover risk on borrowings starting 31 May.
    Futures contracts set up on 1 January, LIBOR was at 5% and the futures price was 95.48. LIBOR on 31 May is predicted to be 4%. Estimate the closing futures price on 31 May assuming basis risk reduces in a linear manner.

    I dont understand the following solution:
    1 January basis is at 0.48%?
    Futures price at 31 May is 96.08?

    Hoping you can explain?

    Many thanks in advance

    October 13, 2012 at 2:29 pm #56413
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Have you watched my lecture on here about forecasting futures prices? The method is explained in full in the lecture.

    On 1 January, LIBOR is 5%, which is equivalent to a futures price of 95.00.
    On 1 January the futures price is 95.48, and so the basis risk (the difference) is 0.48.

    We assumes that this difference falls linearly to zero by the end of the future. Because it is a June future, it ends on 30 June, which is 6 months away from 1 January.

    So….the basis risk will fall by 0.48 / 6 = 0.08 each month.

    On 31 May, if LIBOR is 4% then the equivalent futures price would be 96.00
    Since 31 May is in 5 months time, the basis risk will have fallen by 5 x 0.08 = 0.40.
    This means the basis risk will be 0.48 – 0.40 = 0.08.

    So….the actual futures price on 31 May will be 96.00 + 0.08 = 96.08

    October 15, 2012 at 11:40 am #56414
    harripool
    Member
    • Topics: 13
    • Replies: 33
    • ☆

    Thank you John. I have not watched that particular lecture. Will do so, but thanks for your explanation anyway, very much appreciated.

    October 15, 2012 at 3:00 pm #56415
    harripool
    Member
    • Topics: 13
    • Replies: 33
    • ☆

    Hi John,

    Sorry but which lecture is it? i.e lecture title

    Thanks

    October 15, 2012 at 5:38 pm #56416
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Hi

    It is chapter 19 in the Course Notes and if you go to the P4 lectures page
    (https://opentuition.com/acca/p4/acca-p4-lectures/) you will see that there are 4 lectures on interest rate futures.

    June 26, 2017 at 9:34 am #394092
    Shafiulla
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    Hi there,

    Can you please explain to me if there is any expired/unexpired basis in the below interest rate futures question. Couldn’t figure it out.

    – Company wants to borrow $30Mn in 3 months from now and funding is needed only for
    a period of 3 months.
    – Now = end of June 2017.
    – 3 months US Dollars Futures price : June 2017 96.87 & September 96.79.
    – Currently LIBOR is 3% and company can borrow @ LIBOR +0.9%.
    – Interest Rates could increase by 0.5% in 3 months from now.
    – Derivative contracts will mature at the end of the month.

    Thanking you in advance.

    June 26, 2017 at 3:53 pm #394122
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    Given that you will be using September futures, then the basis will be zero as at the date the loan is taken and the futures expire.

    June 27, 2017 at 4:49 am #394162
    Shafiulla
    Member
    • Topics: 0
    • Replies: 2
    • ☆

    John thanks for clarifying it.

    June 27, 2017 at 7:00 am #394172
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54699
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 9 posts - 1 through 9 (of 9 total)
  • The topic ‘Basis risk on interest rates’ is closed to new replies.

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • kennedyavege@2023 on Relevant Cash Flows for DCF Relevant Costs (example 1) – ACCA Financial Management (FM)
  • mrjonbain on ACCA BT Chapter 6 – Some legal obligations – Questions
  • Ken Garrett on ACCA BT Chapter 6 – Some legal obligations – Questions
  • Ken Garrett on The nature and structure of organisations – ACCA Paper BT
  • OmarAlbeity on ACCA BT Chapter 6 – Some legal obligations – Questions

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in