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Interest rate futures

A

asbes

Member
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.
 
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