it seems like nobody clearly remembers what the question asked, and the answer might be in the details. did it actually asked “caclulate the forward price”. i don’t clearly remember either unfortunately. anyway, the answers were: 1) Par - PV of Coupons 2) Market Price - FV of Coupons 3) Market Price - PV of Coupons of those, only 3) seems to be “apples to apples”. market price is the price today, why would i be subtracting future value. doesnt make sense unless i compound today’s market price forward somehow. same with 1) - par means nothing since you dont know the actual coupon, the bond can be issued at-, below- or above-par. so without knowing the question i’m feeling 3) just based on overall sanity of derivation of the answer. i think the explanation has to be really simple if we could read or remember the way the actual question was phrased, but it is kinda hazy in my head now…
the question asked what is the no-arbitrage price of the bond future.
Bumping again (and again out of sheer anger)…was the exhibit: Market Price of the Underlying? or Market Price of the Forward? if Market Price of Forward…I got it wrong…if Market Price of Underlying…highest answer wins MV * (1+R)^T - FVC
im pretty sure it read market price of the forward
no, it didn’t. it just said “market price” - which is what made it so fcuked up. i assumed with spot price you’re comparing apples to oranges using FV coupon, and you’re not given the risk-free rate, so it had to be the market price of the forward. so i went with price-FVC.
supersharpshooter Wrote: ------------------------------------------------------- > no, it didn’t. it just said “market price” - > which is what made it so fcuked up. i assumed > with spot price you’re comparing apples to oranges > using FV coupon, and you’re not given the > risk-free rate, so it had to be the market price > of the forward. so i went with price-FVC. I noticed this too, I would’ve underline forward had I seen it.
My reasoning was pretty simple (could be wrong of course)… The future value of the bond at maturity is the par value, which was given. The buyer of the forward is not recieving the coupons, so the answer is simply Par value - FV of coupons You don’t need the risk free rate for the calc, which is why it wasn’t given. Using the formula above you’re just taking the PV (ie. market value/spot price) and calculating the FV by multiplying by (1+r). Instead, they gave us the FV’s…
that was my reasoning so_fresh
Ok, let’s just say it is market price of the underlying Market Price of underlying * (1+R)^T - FVC Now I didn’t know how to calculate R. I do know that Market Price - FVC was one of the answers. But I *think* you had to multiple the Market Price times (1+r)^T giving you the highest answer. Any thoughts?
Spot -PVD times rfr son
I am 99.9% positive that the way you would calculate the fwd would be (So-PVC)*(1+r)^t…even though there was no rfr given, we know that the answer would be at least equal to So-PVC. Because that was the highest value given, it had to be the right answer.
It said no arbitrage so lets set up the arbitrage: Today: Borrow the MV at the risk free rate, buy the bond, go short the forward Total Cash Flow = 10,xxx,xxx - 10,xxx,xxx = 0 At Expiration (assuming before maturity of bond): you have FV of coupons, pay back loan, deliver bond, get agreed upon price Total Cash Flow: FV of Coupons - MVe^rt + futures price = 0 (for no arbitrage) therefore, futures price = MVe^rt - FV of Coupons… thats as far as i got
Spot -PVD times rfr daughter
Spot - PVD…no rfr provided so no need to multiply…it seemed too easy but it think this was correct
so_fresh Wrote: ------------------------------------------------------- > My reasoning was pretty simple (could be wrong of > course)… > > The future value of the bond at maturity is the > par value, which was given. The buyer of the > forward is not recieving the coupons, so the > answer is simply > > Par value - FV of coupons > that would only make sense if the maturity of the underlying bond is the same as the maturity of the forward contract, which would be kinda pointless
quant17 Wrote: ------------------------------------------------------- > i used future value as all my quick study sheets > for futures stuff used future value of coupons and > forwards used present values…will dislcaim that > my answer was also a guess. i think this was correct, mrk - fv because if you used the present value then the value would be calculated as v0 = (Mrkt price - PV of coupons) x (1 + r)^T i don’t think they gave us a risk free rate?
for ryan, (S-pvc)*(1+rf)^t = s*(1+rf)^t - fvc … will work if we were to find the future price on the day the coupon will be given … otherwise the “t” will not be same. I dont remember the question details, but I think it was not mentioned that the future price to be priced on teh coupon maturity date. I may be wrong. for so_fresh, Future value of a bond on maturity is not “par value” unless the coupon resets. I think the vinnette didnt say “future value at maturity” is par. Rather it was only the Par value of the bond - which was mentioned in the case. Again, I don’t recall the exact wordings, so not very sure. bottomline, there may be a case here … where CFAI screwed up big time … there was not simply enough details for calculating this one … which really sucks
Shams very well put. And I agree. Somewhat. I think you can eliminate two of the answers unless the RF rate was 0. Future Price = MV * (1+r)^t - FVC MV, FVC given. If you had just done MV - FVC would of given the second highest answer. So eliminating that one and the one below that leaves the highest answer.
shams1882 Wrote: ------------------------------------------------------- > for ryan, > > (S-pvc)*(1+rf)^t = s*(1+rf)^t - fvc … will work > if we were to find the future price on the day the > coupon will be given … otherwise the “t” will > not be same. I dont remember the question details, > but I think it was not mentioned that the future > price to be priced on teh coupon maturity date. I > may be wrong. > huh? t is the time the forward matures. its the same in both of the above formulas so you can set them equal to each other and solve for (1+rf)t
Which exam # are we talking about? None of this is familiar to me.