AFMP4 - Dec 2011, Q2b

Have you watched my lecture on this? Futures are always what are called '3 month futures' which means that when the profit or loss is calculated, it is calculate as though it is 3 month interest. In order to protect ourselves for the interest on a loan lasting 5 months, we have to deal in more futures. So the amount of futures that we deal in is always the amount of the loan x (length of loan / 3). With regard to the 2/6 - it is not 'unexpired'. It is because we assume that the basis falls linearly to zero over the life of the future. So, if the future finishes in 6 months time, then the basis will fall by 1/6 of the current basis each month. If we intend to finish the futures deal 2 months before the date on which the future finished, then the basis will be 2/6 of the current basis. My lecture on this works through a complete example and explains both bits above in detail.

Thanks a lot.That was really helpful.

You are welcome :-)