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calculation of futures price
Predicted futures rate at the end of May = 1.0292 + (6/7 × (1.0369 – 1.0292)) = 1.0358 (when the June futures contract is closed out in May).
we always generally take mid point for spot for the calculation of the same be it with or without the lock in style of approach.
but in this situation they just took the borrowing rate while calculating the basis.why? and doing it in the mid point approach is giving a -ve value too, how to go about with the answer.
isnt it supposed to be 1/7 as the ratio as from May to June 1 mnth duration and a total of 7 mnths?
why is it 6/7 in the answer.
Strictly it should be the mid-market spot that should be used although the current examiner tends to use the relevant buy or sell rate in his answers. Either would be acceptable (even though obviously the final answer will be different).
There will only be 1/7 of the basis remaining at the date the futures are closed out, but that means that the current rate will have changed by 6/7.