I do not know why the following statement is true. Is there someone could explain? Thank you very much. The price of a 90-day forward contract on a 90-day Treasury bill will be above the current price of a 180-day T-bill.
Let me see if I can answer. A 90-day fwd contract on a 90 day T-Bill will have a cash outflow, 90 days from now. On that date, your ‘current 180 day T-bill’ will have 90 days left. For arbitrage to not exist, they should be priced equally. Now; today’s / current price of the 180 day T-bill will have to lower than the price 90 days from now (PV using some discount factor). Spot price of 180day bill = “discounted” spot price of 180 day bill 90 days from now. = “discounted” spot price of 90 day bill 90 days from now. = “discounted” 90 day forward price for a 90 day bill.
Above is correct. That relationship must exist for no-arb condition
Thank you very much. Now I see. I misunderstood the “PRICE” of 90-day fwd contract, with “CURRENT VALUE” of it.
Can someone explain this in a different way? Thanks!