For the seller to profit, should LIBOR rise or fall?
the short needs libor to decrease in order to make money
The seller can make money eitherway. It depends on the contract. If the futures seller sells at a rate X and the rate is Y at expiration. She makes money based on what X and Y are.
I think question said Short. LIBOR has to go down for SHORT to be in money. Q asked Short in money or not, it never asked about seller’s profit.
The seller is usually synonymous with the short…LIBOR would have to fall relative to the contract price for this party to profit
wasnt there a Q where we had to calculate the profit and it was something like 24,700??
A buyer is long the LIBOR rate (want the RATE to go up), a seller/shorter wants it to fall. So if the variable LIBOR rate falls below the contract rate, then a shorter will profit, and will be determined by the “payoff” formula, which is just the difference of the rates hitting by a factor (# of days of the underlying LIBOR rate/ 360) then discounting it back by a factor of [1 + LIBOR rate * (# of days/360)]. When calculating the numerator above, I normally calculate the absolute difference of the rate, then determine the + or - sign later given if I’m long or short a position. Hope that helps.
LIBOR future is quoted in International Monetary Index, which is (1- LIBOR rate)*100, i.e. LIBOR of 5% would be quoted 95. So for seller to gain, quote has to fall, but LIBOR rate has to rise. I hope my memory serves me right.
If the current rate is 4% and two parties get into an agreement to settle at a future price of 3%. The market may go down to 3.5% but the long will still not make money. Though in general people who trade futures usually start a contract at prevailing rates.
dashingdude Wrote: ------------------------------------------------------- > If the current rate is 4% and two parties get into > an agreement to settle at a future price of 3%. > The market may go down to 3.5% but the long will > still not make money. Though in general people who > trade futures usually start a contract at > prevailing rates. Hey, I believe you messed it up with interest rate Forward.
Im not sure what you guys are talking about…was there a LIBOR futures Q? I thought it was a LIBOR forward Q where the forward rate was 4.5% or something