When calculating no arb prices for a treasury bond future why are future coupon values (FVC) subtracted from the spot price as opposed to present values, similiar to stock futures? Example: Calc no arb futures price of a 1.2 year futures contract calling for the deilvery of a 7% bond, 10 years to maturity, price $1040 and risk free rate 5%. FVC = ($35 x 1.05^.7) + ($35 x 1.05^.2) = $71.56 Futures price = ($1040 - $71.56) x 1.05^1.2 Thanks, John
My notes are not in front of me but depending on which formula you are using: FP = ((So)x(1+Rf)^T)-FVC or FP = (So-PVC)x(1+Rf)T You are always going to subtract any income received in a forward or future calculation. I think you may need to double check your formulas. You can do it both ways. Also, don’t forget about the conversion factor when dealing with treasury futures.
Subtract PV from spot or FV from futures price, makes sense, thanks. Chuck, recall your name from level I in '09 and comments being helpful. Noticed you posted something prior about getting beat up by FRA on level II last year, any other insight from the test or areas that caught you off-guard? I took year off so taking level II for first time next month. John
I appreciate it. Yeah, FRA really tripped me up last year. I found myself crunched for time during the morning session mostly because of FRA. I remember stealing a few glances around the exam room with five minutes to go and noticed that everyone, literally everyone, was still furiously working out problems. When I took L1 I want to say like half of the candidates around me were just sitting back and relaxing with twenty minutes to go. Time is so important on L2. Don’t get hung up on one problem. You are guaranteed to end up guessing on at least 5 or 6 questions throughout the exam. I also took a L2 accounting workshop, John Harris, and found that to be extremely helpful. FRA - I wasn’t too versed in the IFRS & GAAP differences last year. There were at least two or three questions that cost me points. It sucks, but you have to commit them to memory. Pension accounting is easy points imo so make sure you know that topic area cold. FRA is also fairly predicable; you will see pension accounting, foreign currency translation, and investment accounting guaranteed. The last vignette is just a toss up but will likely include a mix of some adjustments, off balance sheet, SPE, accruals, etc… Quant - Almost a waste of time to study, but some easy points come out of here. I was lax with my quant studying last year and it showed in my results. The material is incredibly mundane, but the points are low hanging fruit. What I do like about quant is that the answers are in black and white. It’s math and statistics so there is no grey areas. Equities - My best section. There are ton of formulas that you must know. The CFAI really went deep on this one last year: ibbotsen chen, inflation pass through P/E, justfied/trailing p/e, h-model, franchise, pvgo, etc… They tested almost every single equity formula in existence. I want to say that of the 24 questions probably 15 of them each required a separate formula. There was hardly any qualitative theory tested. You have to know your formulas here. AI - Did not respect it enough last year. I took a gamble on the new PE piece not showing up on the exam…well it did. Not to beat a dead horse, but you have to nail FRA & Equity cold. I’m almost going to study FRA exclusively in the last week of my prep. Good luck!