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Kindly ask you to assist.
Q5/dec 2008:
March interest rate futures are quoted: open- 93.8, settlement 93.88 (at the end of the month).We sell the contracts on 1 January – the sell price being 93.88- settlement. (as indicated on the answer).
Why there are two prices open/settlement? I would thing if we SELL we should sell at the smaller price – open 93.8.
As a matter of fact the open price is completely irrelevant; all the workings are based on the settlement price. Even more confusing the settlement price is said to be at the end on the month but the deal (selling the futures) starts on 1st January?!
Thank you!Basically, the open price is the price at the start of the day and the settlement price is the average price for the day. (Its actually a little bit more involved than that, but it is always the settlement price that is relevant. I think I am correct in saying that this question is the only time that the terms open and settlement prices have been used – it was the previous examiner).
Last sentence is much more critical.
The prices given are ‘todays’ prices. When it says ‘settlement at the end of the month’ it means that the futures deal must be completed by the end of the relevant month (i.e. March or whatever).
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