Chapter 11 pg 14: Can someone please explain the formula for the contract price of an interest rate future. I assume the 0.25 is because the rate is compounded quarterly? I would think the rate to use should be derived from: Z*(1 + (i(4) / 4) ) = 100 ==> i(4) / 4 = (100 - Z) / Z According to the notes : i(4) = 100 - Z I think I don't understand how this works in practice (what the actual cashflows are). Thanks.
the 3 month index is quoted per 100 nominal, which means if the index is 95, then the future's interest rate is 5% convertible quarterly - hence the 0.25 factor.
