Hi all, here’s a problem regarding to ss17, LOS 74, schweser book 5, pp143: Q6. The statements regarding forward contracts on T-bill is TRUE? c. The long will receive a payment at settlement if the discount yield is above the forward yield. Why this statement is wrong? the discont yield is the floating rate, rite? if it’s above forward yield, short position better off so long will receive the payment? Please correct me. Thanks in advance.
if the “discount yield is above the forward yield” that means that “discount price is below the forward price (already committed in the Fwd contract)” as Price is inversely related to yield. So, In short, after the contract initiation, the price of the T-bill has fallen down, so long is loosing and short is at the gaining end. Could you paste the complete question here?? - Dinesh S
Thanks, Dinesh! make sense!! Here’s the complete question: Which of the statements regarding forward contracts on T-bill is TRUE? a. the fact value must be paid by the shor at settlement. b.there is no default rish on these forwards bcs T-bills are government-backed. c.The long will receive a payment at settlement if the discount yield is above the forward yield. d.if short-term yields increase unexpectedly aft contact initiation, the short will profit on the contact.
the answer is B?
answer is D Given that this is a T-Bill when discount rates rise, T-Bill will fall in price. so the short will gain, when prices fall.
it’s D - Dinesh S
If you want to protect yourself against rising rates you will want to protect yourself from falling prices. This means ehe party which shorts the forward will recieve a payment if prices fall (yields rise). The long will be the one who pays
Yield rises - Long looses, short profits Yield falls - Long profits, short looses Answer D.