7.6 pricing and valuation of futures contracts Flashcards

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1
Q

Contract Type: Interest rate futures

Gains from Rising MRR?

Gains from Falling MRR?

A

Gains from Rising MRR: Short futures contract

Gains from Falling MRR: Long futures contract

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2
Q

Contract Type: Forward rate agreement

Gains from Rising MRR?

Gains from Falling MRR?

A

Gains from Rising MRR: Long FRA: FRA fixed-rate payer (FRA floating-rate receiver)

Gains from Falling MRR: Long futures contract (FRA floating-rate payer (FRA fixed-rate receiver)

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3
Q

The basis point value (BPV) of an interest rate futures contract is

A

defined as the change in price for a shift of one basis point (0.01%) in the underlying MRR.

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4
Q

The prices of a forward contract and a futures contract on the same underlying for the same maturity will only match if the following conditions are met:

A

The interest rate curve is flat

Futures prices and interest rates are uncorrelated

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5
Q

If there is a positive correlation between futures prices and interest rates, a long futures position will be more attractive than an equivalent long forward position.

This is because…

A

an increase in the price of the underlying will generate profits that can be reinvested at higher interest rates.

–> Conversely, the price of a futures contract will be below that of an equivalent forward contract if futures prices and interest rates are negatively correlated

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6
Q

Correlation between Futures Prices and Interest Rates: No Correlation

Outcome With Rising Interest Rates

A

Futures prices = Forward prices

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7
Q

Correlation between Futures Prices and Interest Rates: Positive Correlation

Outcome With Rising Interest Rates

A

Futures prices > Forward prices

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8
Q

Correlation between Futures Prices and Interest Rates: Negative Correlation

Outcome With Rising Interest Rates

A

Futures prices < Forward prices

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9
Q
A
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