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Hi there,
In the AFM past paper for June 2015, question 4, how do you calculate the futures price? I would really appreciate some assistance.
Kind Regards
Jaime
The current LIBOR is 3.6% which is equivalent to 100 – 3.6 = 96.4
The current December futures price is 95.84Therefore the current basis is 96.4 – 95.84 = 0.56
We assume that the basis falls linearly over the life of the future.
The future matures in 7 months time and the loan will start in 5 months time.
Therefore the basis in 5 months time will have fallen to 2/7 x 0.56 = 0.16.If LIBOR goes up by 0.8% it will have increased to 3.6 + 0.8 = 4.4% which is equivalent to 100 – 4.4 = 95.6. Therefore the futures price will be 95.6 – 0.16 = 95.44
This is all explained in detail in my free lectures on interest rate risk management.
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