Interest rate future–calculating closing price of future

This topic has 2 replies, 3 voices, and was last updated 10 years ago by John Moffat.

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May 2, 2015 at 4:00 am #243591
Tianxiao
Member
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Now is 1st March, if the company wants to borrow money from 1st June to 1st September
and it sells a three month June Future on 1st March.
On 1st March, June future is 3.9, LIBOR is 3.5.
So when we calculate Basis,we get 3.9-3.5=0.4 on 1st March. But why we then devide 0.4 by 4 months instead of 3? The future is a three month future right? The answer says “This basis represents four months from begining of Dec to end of March”, I just don’t get it. I thought the future is from 1st March to 1st June with 3 months life.
Someone please help
May 3, 2015 at 8:31 am #243742
jamshaidrashid
Member
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1st June is transection date, so the available future is June 30th future immediately after transection date. Using 4 month instead of 3 because time line considered March , April, May and complete June month so use as 4 month and 1 month basis unexpired with is adjusted to calculate 1st June Future.
May 3, 2015 at 10:15 am #243756
John Moffat
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Tianxiao: You have asked exactly the same question in the Ask the Tutor Forum, and I answered you there.
(and what jamshaidrashid has written is correct)
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