Forward on T-bill

A trader holds a long position on a forward contract on \$20 million 80-day T-bill priced at 1.85% on discount yield basis. At settlement, 80-day T-bills are priced at 1.95% on discount basis. How much will the trader (or the seller of the contract) pay at settlement for the T-bills? A. \$19,630,000 B. \$19,773,890 C. \$19,917,780 D. \$19,913,333

D

Only one answer, how about others? Do you guys think this is too simple?

I keep getting 19,918,694.

I am doing something wrong, this is the kind of problem i was looking for earlier, I am not sure what b/c i am way off.

Is this Q from Exam 3 AM? If so I think you’ve made it slightly ambiguous with that “or the seller of the contract part” The answer is C…the trader will pay the contract price (based on 1.85% DY) not the current price

even i am way off… i started off with 20M- [(1.95%-1.85%)*20M*360/80]

The seller of the contract will pay 19.913 million for the T-bills if he has to buy them on the open market to deliver them

nirjraina Wrote: ------------------------------------------------------- > Is this Q from Exam 3 AM? If so I think you’ve > made it slightly ambiguous with that “or the > seller of the contract part” > > The answer is C…the trader will pay the contract > price (based on 1.85% DY) not the current price Yes, my intension. It’s a bit tricky before one makes it clear. Hah?

I did 20MM [(1.95%-1.85%)(80/360)] / [1 + (1.95*(80/360))]

It says that the trader is long the forward. Therefore, he bought the forward, and will have to buy the T-bills at the forward price of 1.85% (unless the position is netted but that is not one of the options).

nirjraina Wrote: ------------------------------------------------------- > Is this Q from Exam 3 AM? If so I think you’ve > made it slightly ambiguous with that “or the > seller of the contract part” > > The answer is C…the trader will pay the contract > price (based on 1.85% DY) not the current price Correct, the answer is C holding period rate: 1.85%(80/360) = 0.004111 Settlement price: \$20M * (1-0.004111)=19.917,780 Some issues to keep in mind: 1. Settlement price of Forward on T-bill is based on contract price, i.e. the price previously agreed upon, not the price of the forward on settlement date. 2. No netting in bond forward. 3. Buyer would gain if yield decrease and lose if yield increase. In this case, the trade would lose