How do you calculate the lock in rate on interest rate futures?

Answer 1

Lock in rate

This is the difference between the Libor rate and the futures rate when the contract is taken out on a pro rata basis.

E.g.

Now - 1 July

Libor - 5%

December Futures - 8%

If we are looking to borrow from the end of December (Futures mature at the end of the month)

then the lock in rate is 8% IF we intend to borrow from the end of September (using Dec Futures), lock in rate:- Now 1July----End September is 3 months away---End December is 6 months away Lock in rate = pro rata to 30 September Between 1 July and 31 December

1 July Libor = 5% 31 Dec futures = 8% So Lock in rate = 5 +(3/6 x (8-5)) = 6.5%