A portfolio manager holds a long position on a forward contract on $20 million face value 80-day T-bills priced at 1.85% on a discount yield basis. At Settlement, 80-day T-Bills are priced at 1.95% on a discount yield basis. How much will the portfolio manager have to pay at settlement for the T-bills? A. $19,630,000 B. $19,773,890 C. $19,917,780 D. $19,913,333 I kept getting $4444 for some reason, which was totally off!

Is it A?

A? It’s a forward contract, a promise to buy the T-Bill at the agreed discount rate (1.85%). Not sure it’s 2AM here and my brain is getting tired

19913333.33 I get D as the answer. and 4444 as the loss to portfolio manager.

What’s the answer, and if its not D, then please let me know the correct way to do this.

if its not a cash settlement then, portfolio manager has to pay the preagreed price, which is answer C. 19917777.78 I dont know whats going on. please someone help me with this question.

I think he will pay $19,630,000 plus the loss on the contract, so (0.001 * 80/360)/1+0.0195*80/360) * $20m = ?

How did you get D? I used the 1.85% disc rate and get C. Is my math wrong?

Think the answer is A. It is the agreed up price at which the portfolio manager will be long the bond. 1-.0185 = 98.15% of par. Multiplied by 20mm gets you to 19,630,000.

whoa, why do you calculate discount like that. I’ve seen BDY = D/F * 360/t and using that I get, D = 82222.22222 P = 19917777.78 Which is C.

i get C too…what is the answer?

yah ur right pepp…my bad…for some reason was thinking about fed funds forwards/futures

What would be the FRA payment?

Sorry to keep you hanging It’s C

pepp Wrote: ------------------------------------------------------- > whoa, why do you calculate discount like that. > I’ve seen > > BDY = D/F * 360/t > and using that I get, > D = 82222.22222 > P = 19917777.78 > > Which is C. Im sorry, i am bad with these, what is this? it is not an FRA or an equity swap, what is going on? Can someone walk me thru it - i just got back home What is P in the equation above, pepp?

that’s quant methods, bank discount yield p = face value - discount

gogiants Wrote: ------------------------------------------------------- > that’s quant methods, bank discount yield > > p = face value - discount yeah, but how did you get D? that is step 1, right? Get D 1.95% = D/20M (360/180) 1.95% = D/20M (2) .975% = D/20M 195,000 = D ??? lost on this one, dont know why

Daj, bdy is given by the formula BDY = Discount / Face Value * 360/t or alternatively BDY = 1 - price * 360/t Our goal is to find out the agreed settlement price. The following line in the question “At Settlement, 80-day T-Bills are priced at 1.95% on a discount yield basis.” is IRRELEVANT. ITS THERE TO CONFUSE YOU. again so find out what is the futures price, plug the BDY formula .0185 = D / 20mil * 360/80 you’ll get discount 82222 subtract that discount from 20mil to get the price of 19917777 or alternatively using the other formula: BDY = 1 - price * 360/t p = 1 - .0185 * (80/360) p = .99588 (this is price per $ of face value) multiply this by 20mln you’ll get total contract value of 19917777 The above two formula are also equivalent, people often get confused which one to use. you can use either to arrive at the same answer.

pepp Wrote: ------------------------------------------------------- > Daj, > > bdy is given by the formula > > BDY = Discount / Face Value * 360/t > > ok, i finally got it. part of the problem was that i was putting 360/180 instead of 360/80!!! i am so sorry : ( i read it too fast i guess i got confused b/c i have never seen a BDY question asked this way. At least not in CFAI books.

It is there in the CFAI text too. Read the chapter on Futures, or forwards, can’t remember which one.