It seems you're all making this far too complicated. The U.S. and U.K. interest rates are built into the futures price of every futures contract. You can obtain what they are by simply looking at what the price of the future is vs the current spot and doing the math. Is there some question that the futures are mispriced based on the no arbitrage condition given current interest rates? Otherwise, why in the world wouldn't you just use any futures the has a quote to determine the implied interest rate differential?
Futures Options on GBP/USD
- Thread starter hhiusa
- Start date
well that's exactly what I did. And I used that that IRP, but he said I should be using another number. I wasn't making this complicated. The misunderstanding arose from people who like to give their two cents without reading my question or the thread thoroughly.
Like I said, I got it. I like precision, to some it is does not matter.
I have seen people say they know things, saying and showing or not the same thing. I have not the latter in this thread.
@hhiusa, would you like me to help you?
Lemme do it anyways, just 'cause...
GBPUSD FX futures trade, basically, on the basis of the OTC mkt, a snapshot of which you can see here:
The way the mkt arrives at these numbers is through a procedure the output of which you may observe below:
If you're looking for the discount rate to be used in the context of BS option pricing, that's yet another rate (one of the USD money mkt rates is commonly used).
Lemme do it anyways, just 'cause...
GBPUSD FX futures trade, basically, on the basis of the OTC mkt, a snapshot of which you can see here:
The way the mkt arrives at these numbers is through a procedure the output of which you may observe below:
If you're looking for the discount rate to be used in the context of BS option pricing, that's yet another rate (one of the USD money mkt rates is commonly used).
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the only answer would come from an fx trader who knows what inputs hes using. you can TRY using t-bill rate for USD side (or fed funds) and SONIA for GBP, while keeping in mind that the forward rate will deviate from the IRP (the cross-currency basis). You can't get this latter figure without having a bloomberg. My attempt failed to reconcile the data.
sonia overnight ~22bps, curve is slightly steep, so lets assume 9-month sonia is about 26.5bps
6 month t-bill rate 106 bps, 1y rate 116bps, interpolate 9 months for 111 bps
GBP/USD basis: dont have access to bloomberg but lets take 20 basis points for 1year xccy
The differential is thus 111+20-26.5 = 104.5
Using your initial data 1.2906 * (1 + 104.5/10000*9/12) = 1.3007 > 1.3005 for sep fut
Using current data: 1.2942 * (1 + 104.5/10000*9/12)= 1.3043, still outside 1.3051 - 1.3068 bid-ask
sources: http://www.bankofengland.co.uk/boea...tionRequired=I&HideNums=-1&ExtraInfo=false#BM
https://fred.stlouisfed.org/series/DGS1
https://fred.stlouisfed.org/series/DTB6
Boom!
I am certain that with all the correct inputs and day count conventions etc, you'd reprice it correctly.
In a "fair" FX swap you sell me some spot GBPUSD and buy GBPUSD from me on a forward basis. Since you invest your USD proceeds at a better rate than I invest the GBP you gave me, we fix the forward so that I am compensated for holding a lesser-yielding currency (so that I sell you the forward GBP at more advantageous for me exchange rate = the IRP theory). In an "unfair" FX swap OP says that he also wants to do an FX swap with me but hes willing to push this forward exchange rate in my favour beyond what IRP says so that I do with him and not with you. If no one else in this thread is willing to buy spot GBPUSD at a forward rate prescribed by IRP, we have created a basis. 20 bps is how much I think current USD lenders extort beyond IRP to part with their spot dollars to get some pounds.
Afaik this basis is traded OTC with maturities from 3mo to at least 10 years, so you can observe it. The counterparties exchange principals in different currencies at spot and then again at maturity at the original spot rate. The party who bought spot GBP pays sterling LIBOR throughout the term, while the party who got the more precious spot USD has to pay USD Libor + the extortion fee of 20 bps. Another way to think about it would be you borrowing USD from me at USD LIBOR + extortion fee, where in lieu of collateral I take your GBP at Sterling LIBOR interest rate.
I suggest you google it cus there are a lot better explanations on the internet than mine.
Afaik this basis is traded OTC with maturities from 3mo to at least 10 years, so you can observe it. The counterparties exchange principals in different currencies at spot and then again at maturity at the original spot rate. The party who bought spot GBP pays sterling LIBOR throughout the term, while the party who got the more precious spot USD has to pay USD Libor + the extortion fee of 20 bps. Another way to think about it would be you borrowing USD from me at USD LIBOR + extortion fee, where in lieu of collateral I take your GBP at Sterling LIBOR interest rate.
I suggest you google it cus there are a lot better explanations on the internet than mine.
X-ccy basis represents the idiosyncratic value of USD liquidity. That's the "extortion fee" that @Eurokopek referred to and it's simply the additional value associated with holding USD cash or cash-like instruments.