(a) It is 1 st May 2021, the 3 month (91 days) £LIBOR spot interest rate is 7% and the 6 month (182 days) £LIBOR spot interest is 6%

Finance Jan 19, 2021

(a) It is 1 st May 2021, the 3 month (91 days) £LIBOR spot interest rate is 7% and the 6 month (182 days) £LIBOR spot interest is 6%. Calculate the appropriate price of the 30th July £LIBOR interest rate futures contract.

(b) Explain the rationale behind your result given that the contract size is for £1 million.

Expert Solution

ANSWER

(a)

Forward rate formula = ((1 + s1)ⁿ¹ / (1 + s2)ⁿ²)^1/(n1-n2) -1

= ((1 + 0.06)^0.5 / (1 + 0.07)^0.25)^1/(0.5-0.25) -1

= 5.01%

(b)

Contract size = 1,000,000

interest rate = 5.01%
interest rate = 1,000,000 x 5.01% = 50,093.46

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