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Good day John,
please can you enlighten me with the way the Future prices was calculated on question 2 of the dec 2014 exam? we were given the current basis as 44, on the day the money was to be as 22. current LIBOR was 3.8% and Keshi was expecting it to either increase or decrease by 0.5% . In the solution the future price was calculated as 100 (3.8+.05)-22 for an increase in interest rates.
why was 22 subtracted and not added. By subtracting are we assuming that the future price is above the current interest rate?
If i try it with the way you extimated the future price in the lectures, i will not get the same figureWhat you say is correct, although it is assuming that the current futures price is below the current interest rate. (If it is below now, then it will always be below, but the difference/basis will reduce). It is an assumption and the examiner should have said so.
(And apart from that it is done in the same way as the lectures – it is just that you have been told the basis instead of having to estimate it)
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