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Sir, I know how to calculate lock-in rate, but could you explain what is the implication of lock-in rate, and when to use it, pls?
I find the effective interest using lock-in rate is just equal to the net effect of cash trans and futures trans.The point is that if the basis (the difference between the current interest rate and the current futures price) was to stay constant, then the effect of using futures would be effectively to keep the current interest rate fixed.
However, the basis will change over time (because at the end of the future it will be zero) and so the net effect will not be to keep the effective interest rate constant.
If we assume that the basis changes linearly over the life of the future (which is not in fact necessarily the case) then we can predict what the effect of this would be and therefore what the net effect will be. This is the ‘lock-in’ rate, because subject to the linearity assumption, we are fixing the net effective interest rate by using futures.
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