Study Session 14: Derivative Investments: Valuation and Strategies
How can “a one-month risk-free rate of 1%, quoted on an annual compounding basis” be understood in simple terms?
Along similar lines, how can one explain “a five-month risk-free rate of 2.5, quoted on a semi-annual compounding basis” or “a nine-month risk-free rate, quoted on a quarterly compounding basis”?
The frequencies make these statements very abstruse. Please help me understand how it works.
I am trying to do this fixed income futures question by calculating the QF for the underlying bond, then comparing it with the QF of the futures contract.
Quoted futures price
Quoted bond price
Accrued interest since last coupon payment
Time remaining to contract expiration
Accrued interest at futures contract expiration
is the notional exchanged in the a equity swap.
If Pvs are:
na = 50M
Term 3 year annual
Fixed Rate 3%
Johnson also uses the present value factors in Exhibit 1 to value an interest rate swap that the bank entered into one year ago as the receive-floating party. Selected data for the swap are presented in Exhibit 2. Johnson notes that the current equilibrium two-year fixed swap rate is 1.12%.
the answer is :
The CFA book explanation says that value of currency forward contract is:
Vt(T)=Present value of the difference in forward prices=PV£,t,T[Ft(£/€,T)−F0(£/€,T)]
But in the example:
Q) [question removed by moderator]
The value of the foreign exchange forward contract at Time t will be closest to?
In the cfa book it is mentioned that:
Second, fixed-income futures contracts often have more than one bond that can be delivered by the seller. Because bonds trade at different prices based on maturity and stated coupon, an adjustment known as the conversion factor is used in an effort to make all deliverable bonds roughly equal in price.
Does this mean that Govt bonds with different maturities and coupon have similar prices? Should they have diferent prices so the associated risk of # year of maturity, liquidity etc.
What does FRA contract expiring and maturing mean?. if FRA(0,30,90) . It expires in 30 days but matures in 90 days. It is expiring before maturing. Not able to understand this part.
Why is the value of Forward Contract Zero if you sell it at time t: why not Vt(T)
1. Buy Forward contract 0 at F0(T)
- cash flow at time 0 =0
- value at time t = Vt(T)
- Cash flow at time T = ST - F0(T)
2 Sell Forward contract at t at Ft (T)
- cash flow at time 0 = NA
- value at time t = 0
- Cash flow at time T = Ft(T) - ST
Quoted Futures Price 125
Conversion Factor 0.9
Time Remaining to Contract Expiration - 3 months
Accrued Interest over life of contract 0
Quoted Bond Price 112
Accrued Int. since last coupon 0.08
Accrued Int. at Futures expiration 0.20
Based on Exhibit 1 and assuming annual compounding, the arbitrage profit on
the bond futures contract is closest to:
Answer is 0.5356.
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