Dear Tutor,
Can you help please?
QUESTION
TODAY
LIBOR 6.5%
Futures 93.20
On the date of Investment, what will be the hedge result using futures if:
a) Interest rates fall by 1% - Futures prices move by 0.85%
b) Interest rates rise by 2% - Futures prices move by 1.9%
Solution A
LIBOR will now be 5.5%
Futures will be (93.20 + 0.85%) = 94.05
Solution B
LIBOR will now be 8.5%
Futures will be (93.20 – 1.90%) = 91.30
MY UNDERSTANDING (i.e. My Solution)
The question said futures moved by % (percentage), hence not an absolute figure as used in the solution above. So I had:
Solution A
LIBOR will now be 5.5%
Futures will be (93.20 + 0.85% x 93.2) = 93.99
Solution B
LIBOR will now be 8.5%
Futures will be (93.20 – 1.90% x 93.2) = 91.43
Is my interpretation of the % correct? And if so, should i just state my assumption/interpretation in the exam and I get my marks?
Thanks
Ask the Tutor ACCA AFM
Interpretation - Futures
Had a rethink just now and hink i figured it out.
Taking Question A for example
Futures of 93.20 is actually 6.8%
So if LIBOR falls, Futures will go up. To reflect the Futures increase, then the Interest of 0.85% must reduce the 6.8% above (i.e 6.8% - 0.85% = 5.95%) which is equivalent of 94.05 Futures.
I understand the concept but the way it was worded that futures moved by 0.85% was what confused me initially.
Hope I got it now?.
12y ago#2Yes - you have got it now OK :-)
Great! and thanks.
12y ago#4You are welcome :-)
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