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Sir this is solution for farward rate market hedge it says
Interpolating the rate for 4months forward=
1.5398-(1.5398-1.5178)/9=
1.5398-.0024=1.5374
My question is why are we subtracting this from three months as we have to calculate for 4months shouldn’t we be adding this to three months.ThanksSince the 1 year forward rate is lower that the 3 month forward rate, then the 4 month rate must surely be somewhere between the two!
If 12 month is lower then 3 month must be lower; if 12 month were higher than 4 month would be higher.
Think about it. Its not because its a rule but because it would be ridiculous if the 4 month rate was not between the 3 month and the 12 month one 🙂
Hi John,
In polytot plc, when calculating the forward rate for interpolationThe rates used are lower ones instead of the higher ones..
When we, polytot are at the receiving ends .. We receive in dollars and convert them into pound (home currency) the banks should take more dollar from us and give less pound. That means the higher rate was to be used. But the examiner has used the lower ones.
Please explain.The examiner has calculated both the buy and sell forward rates.
He has used the higher one (1.5374) for the conversion, which is correct (and didn’t need to have calculated the lower one).Hello Sir,
I get very confused on the basis calculations as such.
For the Polytot question.
I used 1.5475 as the spot and subtracted december futures of 1.5275 from it to get the ticks now i used 2/6 as unexpired basis and the result was 0.0067, i added this back to the future rate to get the new future rate which came out to be 1.5342, i used this rate to calculate the no of contracts.
I get confused when i see the solution , when the examiner uses either the forwards rate or the 2 future rates as the method of interpolation to calculate the future rate.
Thankyou.
I don’t know which answer you are looking at, but the examiners answer calculates the lock-in rate for the futures in exactly the same way as you have done. However you have made a mistake.
You used the 1.5475 as the spot rate but you should have used 1.5510 (because they are receiving $’s and therefore selling $’s to buy pounds).The only interpolation that he has done is with regard to the forward rates (not the futures) because you are not given a forward rate. In that case there is not alternative to interpolating between the 3 months and 12 months forward rates (and I have explained this in my earlier posts in this thread).
(Incidentally, even if your workings were correct, 0.0067 is not ticks – it would be 67 ticks. However there is never ever any need to work in ticks (as I explain in my free lectures) and the examiners answer doesn’t mention ticks either.)
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