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Dear sir,
(1)
I don’t understand why in the futures method, the loss on the futures market (assuming rate + 0.9%), the loss on futures market is 5.45% – 5.24%.Is it that if I buy futures of 5.24%, no matter at what point I sell off the contract, I get to enjoy the 5.24%?
So does it mean if the spot rate at three months later is 4.55%, and I immediately sell off the future, then I get interest rate of 5.24%?
(2)
Why is the effective interest rate for the futures be 4.58% then?
Since we bought futures that of 5.24%, shouldn’t my effective interest rate be 5.04% (5.24% – bank charge 20 basis)?This is true for forward when I enter into forward contract of 4.82%, the effective interest rate is 4.82% – 0.2% = 4.62%. Why is it not the same with futures?
Even when I do calculation, I still cannot get effective rate of 4.58%:
Spot rate (4.09% + 0.9%) = 4.99%
Add: Basis = 0.46%
Bank charges = (0.2%)
Loss on futures (5.45% – 5.24%) = (0.21%)**Effective rate (sum of all above) = 5.04% (Answer = 4.58%)
**This is what I asked in (1): why did they deduct 5.24% rate when the futures have not matured on that day.
Thank you!!!
1. No. You buy futures at the price quoted now (94.76, which is equivalent to 5.24%) and you then sell them at whatever the price is on the date that the deposit starts. The difference is the profit or loss on the futures. The futures mature on 31 March, but you do not wait until they mature – you sell them on 1 February.
This (and your second question) is all explained with examples in my free lectures on managing interest rate risk. I am sorry but I cannot type out all of my lectures here 🙂
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