Futures Options on GBP/USD

Discussion in 'Forex' started by hhiusa, Jun 6, 2017.

  1. Sig

    Sig

    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?
     
    #31     Jun 8, 2017
  2. Quiet1

    Quiet1

    Well tbh, I think it's just trying to figure all this out. It's not so easy if you don't already know. Even if you think you've got it, it takes confidence to trust your own working.
     
    #32     Jun 8, 2017
  3. hhiusa

    hhiusa

    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.
     
    #33     Jun 8, 2017
  4. hhiusa

    hhiusa

    I have seen people say they know things, saying and showing or not the same thing. I have not the latter in this thread.
     
    #34     Jun 8, 2017
  5. @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:
    gbpusd fwds2.jpg

    The way the mkt arrives at these numbers is through a procedure the output of which you may observe below:
    gbpusd fwds1.jpg

    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).
     
    Last edited: Jun 8, 2017
    #35     Jun 8, 2017
    Pippi436 likes this.
  6. 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
     
    #36     Jun 8, 2017
    hhiusa, Pippi436 and Martinghoul like this.
  7. Boom!

    I am certain that with all the correct inputs and day count conventions etc, you'd reprice it correctly.
     
    #37     Jun 8, 2017
  8. Whats the 20 basis points for cross currency for?
     
    #38     Jun 8, 2017
  9. 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.
     
    #39     Jun 8, 2017
    Pippi436 likes this.
  10. 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.
     
    #40     Jun 8, 2017
    Pippi436 likes this.