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john in working out the 4 month forward rate why the change in forward rate per month from 3 months to 12 months which is calculated as (1.5398-1.5178)/9 deducted from 3 months forward rate.Is not is suppose to be added to the 3 month forward rate to get the 4 month forward rate.
Hi John i have just seen the difference .0024 is actually deducted from 3 month forward rate of 1.5398. Please clarify.Thank you.
and John could you please kindly check if the futures rate are given id pound per dollar or dollar per pound.IS not it suppose to be dollar per pound?I think there may be a printing mistake.
if i find the lock in rate for future by substracting the unexpired basis of .0078 calculated by (opening future price minus spot rate) which gives me expected future price of 1.5197 and just divide the dollar amount to be received which is 4124236 is it going to be correct because what i see in BPP they did it another way by assuming a spot rate and than adjusting the spot market outcome with the future market outcome.
Ooops – yes of course it is subtracted. The four month rate must be between the 3 month and the 12 month rates.
Sorry john i know i am dumb i really did not get why its substracted.Is it like basis that as 3 month forward is higher gradually it will decrease to be equal to 12 month forward rate.Please can you explain a bit elaborately.
The 12 month rate is lower than the 3 month rate.
Since we are forced to assume that it moves linearly, then the 4 month rate must also be a bit lower that the 3 month rate. It must be in between the 3 and 12 months rates.
i got it now thank you.So it just work in the same way like basis risk which moves linearly.If the 3 month forward rate was lower than 12 month rate than instead of deducting we would have added the difference to the 3 months rate.Am i correct?
Thanks a lot John.
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