R16: Swaps, Forwards And Futures

Question 1

If you want to reduce duration, what kind of interest swap would you use?

Answer 1

Pay fixed, receive floating

Question 2

Eurodollar futures - BPV formula?

Answer 2

$1m × 90/360 × 0.0001 = $25

Question 3

For eurodollar futures, what is the price quoted (IMM) as?

Answer 3

100 - annualised forward 3mth rate

Question 4

What’s the basis formula?

Answer 4

Cash price - Future P (×CF). Starts negative and converges to 0

Question 5

If you’re worried about the € depreciating, would you buy or sell a € future/fwd?

Answer 5

Sell

Question 6

What’s contango and backwardation?

Answer 6

Contango: future price for far dated contracts are higher. Opposite for backwardation.

Question 7

Variance swaps: if you’re long are you long or short gamma? Convex or concave?

Answer 7

Long gamma, convex payoff

Question 8

What’s the probability of rate change formula?

Answer 8

(Expected FFER - Current FFTR)/(new FFTR if rates increase - Current FFTR)

Where current FFTR is the mid-point