LIBOR future

CFA Level I
#1

For the seller to profit, should LIBOR rise or fall?

#2

the short needs libor to decrease in order to make money

#3

Anyone?

#4

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.

#5

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.

#6

The seller is usually synonymous with the short…LIBOR would have to fall relative to the contract price for this party to profit

#7

wasnt there a Q where we had to calculate the profit and it was something like 24,700??

#8

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.

#9

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.

#10

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.

#11

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.

#12

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