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Hi John
Lock in rate is arrived by adding the unexpired basis to the Futures price if the spot rate is greater than the futures rate and by subtracting the unexpired basis from the futures rate when the futures rate is greater than the spot rate. Is my understanding correct.
If the 3 months forward rate is 1.5523 and 12 month forward rate is 1.5664 how do you derive the 5 month forward rate based on the above information. Please explain the logic behind the calculation.
Regards
Mathias Lobo
Your understanding of the lock in rate is correct.
With regard to forward rates, you apportion between the 3 month and 12 month.
So…..the three month rate is 1.5523.
We need another 2 months. Between the 12 and 3 month rates is 9 months and the difference in the rates is 1.5664 – 1.5523 = 0.0141
So the estimate of the 5 month rate is
1.5523 + (2/9 x 0.0141)
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