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Sir,
I don’t understand why the unexpired basis is added (not deducted).
I have calculated the Sept Futures as follows:
Spot 1.1485 – Sept Future 1.1422= 0.0063
Unexpired basis 0.0063*1/7= 0.0009
Estimated Future Price September= 1.1422 – 0.0009= 1.1413Why in the answer provided the unexpired basis is added? Would it be considered an error in the exam?
Thanks for your help.The lock-in rate will always be between the current spot and the current futures price (because the two move closer together over the life of the future).
Given that the current spot is higher than the current futures price, the lock-in rate must be between the two and so here we need to add the unexpired basis (and so subtract it would be en error).
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