Dec 2014 Keshi

I never use ticks (and I explain why in my lectures). It is up to you, but there has never been a question where you have needed to use ticks. (You should know what ticks mean – and I explain that as well – but you certainly don’t need to use them.)

I don’t know what you mean by the gain having been pro-rated!
If you are asking about the 3/12, then it is because they are 3 month futures that we have the options on, and the gain is always calculated that way (as, again, I explain in the lectures).

Yes – which is what I do in the lectures.

But, for interest rate futures we have to divide the difference by 400 in order to calculate the gain (to calculate it as a three-month percentage, because they are three month futures). Again, I go through all of this in the lectures.

(a) yes (although I don’t know why you would want to)

(b) Keshi want to borrow fixed, but it paying out L + 0.4% so to make it fixed they receive 0.4% from the counterparty. This leaves them only paying 0.4%, so to end up with the required payment (of 5.5% – 0.56% = 4.94%) then have to pay the extra 4.54% (4.94 – 0.4) to the counterparty

(c) Yes – the total benefit is 0.8% of which 70% goes to Keshi and therefore the other 30% to the counterparty.

(d) see (b)

(What you might find useful is to watch the lecture that I have uploaded working through Q1 of the June 2014 exam, because there is a swap in that question as well. (Which does make it rather less likely that he will have a swap for a third time this time 🙂 )