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Hello Tutor,
Basis = Future price – Spot rate
When IR rises to 0.5%
The spot rate on 1 feb 2015 = 95.7
And it says basis is 22 points.But why is basis negative?
I would have calculate it:
X – 95.7 = 0.22
X = 95.92The basis is the difference between the spot rate and the futures price, and will be positive or negative depending on which is the higher of the two (but will always stay positive or always stay negative as it approaches zero by the end of the future).
In this question it was a little bit unfair of the examiner not to make it clear as to which is the higher of the two (and he usually does), and so if you had done what you are wanting to do then you would still have got the marks 🙂
(Have you watched my free lectures on the management of interest rate risk?)
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