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In past exam papers and revisions we are usually asked to edge the interest risk with options or futures. Usually this is for periods <1 year. In the last exam session we had a period of 18 months (if I am not mistaken). Can you please advise on the correct approach to take even for the calculation of contracts required?
Thanks in advance,
Alex
The ‘rule’ is the same regardless of the length of the loan.
The number of contracts is the amount involved x (length of loan in months / 3) divided by the contract size. I explain the reasons for this in my free lectures.
Thank you John. so let’s say that we have
contract size $100,000
amount $50,000,000
length of loan 18 mths$50,000,000 * (18/3) / $100,000
Thanks, I panicked and I didn’t know how to solve this even though I knew the rule
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