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I am on my third attempt for the P4 paper and I have always struggled with this topic as I did not understand it at all. But having watched the lectures on open tuition, I think I can understand it. I have been attempting to do June 2015 paper (Q4) and I got stuck when trying to estimate the basis risk. I have been using the Open tuition lecturer’s method, and when apportioning the 0.56, i don’t understand why the examiner is using 2/7 instead of 5/11??? Am lost
They are December futures, and ‘today’ is 1 June. So there are 7 months up until the expiry of the futures.
The borrowing will take place in 5 months time, and so there will be 2 months (7-5) unexpired when the futures deal is finished. So the basis on that date will be 2/7 of the current basis.
(That is the same way as in my lectures – I am afraid that I don’t know where you are getting 5/11 from.)I guess i was taking from today’s date 1 june to end of the loan = 11 month and start of the loan 1 november to end = 5 months…. i didnt think of the futures expiry… guess i need much more practice ? thanks a lot
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