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Homework answers / question archive / (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%
(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.
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
