Could anyone please explain why we have this equation?
I remember that equation of calculating PRICE if we know Interest rate is
PV = FV/(1+r)^N but the equation below seems exotic.
it is the quotation method for interest rate futures.
180day MMR = 5% = 0.05
Futures quite = 100 - 5% = 95
or
100 - (100 x 0.05) = 95
100 here is FV right and Calculation of PV in the INTEREST RATE FUTURES and PV in the MONEY MARKET INSTRUMENTS with DISCOUNT-RATE BASIS are similar???
PV = FV/(1+r)^N
and this
100 - (100 x 0.05) = 95
have nothing to fo with each other.
PV = FV/(1+r)^N gives me the present value of a cash flow
100 - (100 x 0.05) = 95 is a quotation method derivatives futures
Money makets and futures
Futures are are based future interest rates
If price of of STIR for 90 day rates = 95
Interest rates = 5%/4 = 1.25%%
Money market instruments
priced on spot rates
If 90 t-bill quoted on discount 5%
Rate = 5%/4 = 1.25%
Price of t-bil = 100 x (1 -1.25%) = 98.75
and the quoted AOR (360d) is actually = (100/98.75 - 1 ) * 4 = 5.06%
The calculations are different.
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i.Are there any reasons behind that QUOTATION METHOD DERIVATIVES FUTURES? or All i can do is to learn by heart that equation?
ii. In my opinion, this equation is useless because we don’t need that information to value the futures contracts?
if you have negative rates you don’t need to have a negative quote.
follows rule : rates up prices down
If we were to start again, given we have computers, and the financial overlords gave us a set of rules most of the methods we use in deriavtives and fixed income would be different.
I think it is stupid some countires buidl spaceships using imperial measurements but it they do and they work.
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