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This is my premier question on this site, i crave your respnse please.
while reveiwing this question i observed there was a 0.21 spread on the interest/futures value in page 5 of the document. My understanding was that the basis spread of 0.21 be devided by 3 since interest rate futures are for 3 months. On the contrary the author multiplied the basis spread by 0.5/3.5 (effectively dividing the basis spread by 7). please kindly shed more light on this. thank you sir.The rule is that the spread is divided by not the term of the future, but by the term from “now” 15 of December till expire 31 of March, which is 3,5 months. And 0,5 represents the time from exercise of the future 15 of March to the expire which is 0,5 months. So the idea is that basis reduces by 0,21/3,5 = 0.06 each month, and by 15 of March it should be higher than spot rate by 0.5*0.006 = 0.03.
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