There is a good thing about Stub Risk. Since FRAs (and swap fixations) act as options automatically exercised on silver, their delta change is predictable. And the IMM data does not change, so we know which part of a FRA delta we can assign to the Stub part and which part to the next IMM (even for 1 month and 6 month fasteners). But is this still true? Below is a brief example showing that a futures contract does not necessarily have a delta equal to one. To simplify the calculations, suppose the interest rates are 0 (r = 0%). Many derivatives professionals will immediately designate a futures contract as a delta-one-trade. This is because they believe that a sell position at the front can always be perfectly guaranteed by buying the same amount from the underlying to the spot price and vice versa. It will also be a static protection, since it no longer needs to be modified for the duration of the contract after its performance. The above example could be explained from an over-hedge perspective.
With the risk-free interest rate of 5% and the dividend rate of 1%, the futures contract increases to 4% (5%-1%, the dividend element being squeezed out on the futures contract price), while the hedge position is up 5% (the speculated position receives the dividend of the shares). The coverage on the right is .99 (= 1.04/1.05). Betting on a Delta One position results in an overdeposition of a long position of 0.01 in the underlying stock. For example, a 3-month fra fix on September 4, 2018 shares 86% of its overnight rate commitment with the SEP18 STIR, which will be set on September 13, 2018. So it`s a pretty good protection. There is a risk for the borrower if he had to liquidate the FRA and the interest rate on the market was unfavourable, which would result in a loss of the borrower on the cash compensation. FRA are very liquid and can be traded in the market, but there will be a cash difference between the FRA rate and the prevailing price in the market. Generally speaking, the above analysis reminds us that we need to consider all the factors that move with the share price when determining the right delta for a futures contract. .