Dear Sir John Moffat,
I want to know how we calculate unexpired basis. Please share me the actual formula of calculation and in the question Dec 2022 (Fondir Co.) today date is missing. I see the ACCA Technical article (hedging) its shows the formula of Basis risk.
Basis can be assumed to diminish to zero at contract maturity at a constant rate, based on monthly time intervals
Use in basis calculation:
• Period between investment date (31 January) and contract maturity date (31 March) (two months)
• Period between today’s date (1 October) and contract date (31 March) (six months)
Further, I see the answer it calculate
Current price (on 1/1) - future price = total basis
(100-3.3) - 96.10 = 0.60
Unexpired basis = 2/6 x 0.60 = 0.20
How we take this 6 in denominator? because today date is not mentioned in question according to above formula.
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Fondir Co.
3y ago#1Todays date is not missing in the question.
It says that they will receive cash in 4 months time on 1 May. So todays date must be 1 January.
As far as the rules are concerned, they are all explained in detail (with examples) in my free lectures on interest rate risk management (and is important to understand the logic - which I do explain - rather than to just learn rules).
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