Forward on T-bill

hopetobeat · May 30, 2008, 5:17pm

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

getterdone · May 30, 2008, 5:19pm

D

hopetobeat · May 30, 2008, 5:44pm

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

system · May 30, 2008, 5:48pm

I keep getting 19,918,694.

amberpower · May 30, 2008, 5:55pm

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.

nirjraina · May 30, 2008, 6:00pm

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

cfaiscomplex · May 30, 2008, 6:01pm

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

nirjraina · May 30, 2008, 6:03pm

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

hopetobeat · May 30, 2008, 6:04pm

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?

amberpower · May 30, 2008, 6:05pm

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

system · May 30, 2008, 6:09pm

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).

hopetobeat · May 30, 2008, 6:18pm

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