Future/Forward pay-off

CFA Level III
#1

some question that we have to calculate future pay-off

given s0 , Future price at time 0

after time past to t they give st and Future price at time t

assume we long future

i saw some answer that use :

future pay-off = (Future price at time t minus Future price at time 0) * notional prin__________1

another use

future pay-off = (Future price at time 0 minus Spot price at time t) * notional prin__________2

if spot price is not equal future price at time t

which one that i should use?

please help , thx a lot

#2

it looks like the first equation is the FV of a payoff. since you will pay the futures prices at some time in the future you would discount that back to today to get the PV. the second equation is at maturity of the futures, you’d compare the futures price to spot price. depending if you’re long or short you can rearrange the inside of the ( )

that’s what it looks like to me. provide a text reference it might help others

#3

i thought when we long futre , it no matter how future price change, pay-off is the difference between spot rate at the time maturity and future price that we have bought

so why some answer use future price that we bought compare to future price at time t?

(there are some of them in the mock, but i can’t remember T_T)

#4

if t = maturity of the contract, then

future pay-off = (Spot price at time t minus future price at time 0 ) since at maturity spot price = future price

if t is not the maturity of the future ( then it is still rolling and you are exposed to basis risk) then :

future pay-off = (Future price at time T minus Future price at time 0)

#5

and if you are expecting delivery, then just use the forward you locked in.

#6

If you are correct summerside182- please explain question 41 of schweser pm exam 1 of volume 1.

it appears it uses the futures rate at the 180 day maturity of the contract. In answer it is .79-.785 when the spot rate is .75. This is confusing the hell out of me. Anyone know where the specifics are in text (exact pages)?

id post the question but it won’t let me.

#7

Anyone? Anyone?

#8

for a futures contract use the change in futures price. Not sure why Spot would even figure out there.

So if you sold a futures contract -> -Notional (Ft - F0) = Gain / Loss on Futures.

If you bought a Futures Contract -> + Notional * (Ft - F0) = Gain / Loss on Futures.

If Ft > F0 and you bought -> you gain

If Ft < F0 and you sold -> you gain

If you looked at Q8 in 2011 AM - they tell you that futures price = Spot at Expiration.

#9

they dont say anywwhere that the contract is a 180days future. In real life, it is very hard to find a matching contract with your investment horizon.

if future price is not equal to spot price, you can assume that the contract is still rolling, this is what you need to do here.

#10

Sounds good thanks