I have a few questions regarding Derivatives:
- “If futures prices and interest rates are uncorrelated, forwards and futures prices will be the same”, I believe that in this case, the futures price is at inception (which is also equal to the fixed agreed-upon price) because later the future price would fluctuate based on the underlying asset price and lower compounding period to converge the underlying future spot price. Is it correct?
- The value of a forward contract at expiration = S(T) - F(T). In this case, the F(T) is calculated based on the P(0) - the cost of capital which means that S(T) - F(T) also accounts for the cost of capital at expiration.
The value of a forward contract before expiration (at t<T) = S(t) - F(T)/(risk-free rate)^(T-t) - (cost of capital)*(risk-free rate)^t which means that cost of capital is eliminated in this calculation.
I want to ask that why the cost of capital is accounted at expiration but not before expiration?
- About Forward Rate Agreement, we use FRA to hedge interest rate risk for future borrowings/lending rights? So there is only a transfer of difference in the contract rate and Libor based on the notional principal. And how synthetic FRA works to replicate real FRA?
Thank you so much!!!