If you did S-PVC you got choice C (largest answer, around 10.5M) If you did S-FVC, you got choice B (second largest answer, around 10.2M) I dono what you’d have to do to get A. What threw people off was the lack of T or rfr. I initially got C but thought that for a 6th item set Q on derivatives this was wayy too simple and put B. Someone said there’s some kind of exception with treasury bonds where you have to subtract FVC from Spot rather than PVC? Any good educated guesses on this?
my educated guess is that i put s-pvc. so since i put that as my answer, chances are that it will be the other one
oh i think A was if you used par value rather than market value
lol skip. That’s exactly what I put. If there’s an exception for treasuries and I’m wrong I can live with that. I thought there had to be a trick somewhere in there but I couldn’t figure it out so I went with what I knew. I didn’t waste too much time on that question. Except for maybe a minute or so looking for the risk free rate like most poor souls on this one.
You have a forum full of well educated level 2 candidates who can’t collevtively come to a conclusion on this question. I think its safe to say this one will get tossed out like the Orlando Magic.
or the level 2 candidates on this forum will get tossed out of the cfa program for being collectively stoopid
CLT2 Wrote: ------------------------------------------------------- > You have a forum full of well educated level 2 > candidates who can’t collevtively come to a > conclusion on this question. > > > I think its safe to say this one will get tossed > out like the Orlando Magic. I so agree. At the end of the day we are all smart analytical people, some of us even price things for a living; oh and there is the internet and all the study material and not one person can give any sort of rational answer of how to answer that question.
I was also dumbfounded by the lack of a given Rf or T, but you can solve for the value of (1+Rf)^T by setting these equations equal to each other…but I didn’t find this useful at all on the test. F=(S-PVC)(1+Rf)^T F=S(1+Rf)^T-FVC I chose B because the other answers didn’t seem to make sense to me.
CLT2 Wrote: ------------------------------------------------------- > You have a forum full of well educated level 2 > candidates who can’t collevtively come to a > conclusion on this question. > > > I think its safe to say this one will get tossed > out like the Orlando Magic. i think believing that every Q that AF cant figure out will be tossed out is wishful thinking
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i picked a and used the par value… had C as the answer then thought it was too obvious :-/
lol this is unbelievable. we have all our brains, all our books, the question, the answers, and still cant reach an answer.
We have two formulas to pick from. We were given “market value” whatever that means, PVC, FVC and par. My guess par was irrelevant. So which one do we pick, FP = (S - PVC) * (1+R)^t => FP/(1+r)^t=S - PVC so my guess was that they were asking for FP/(1+r)^t which in a sense “price” at which you would initiate position, since it make it zero value. or FP = S*(1+r)^t - FVC in this formula you need the rate and t to figure anything out, and even if they were asking for S*(1+r)^t you need to add FVC to FP to get some sort of answer which would not match any of the answers.
CFA=NOLIFE Wrote: ------------------------------------------------------- > We have two formulas to pick from. We were given > “market value” whatever that means, PVC, FVC and > par. My guess par was irrelevant. > > So which one do we pick, > > FP = (S - PVC) * (1+R)^t => FP/(1+r)^t=S - PVC > so my guess was that they were asking for > FP/(1+r)^t which in a sense “price” at which you > would initiate position, since it make it zero > value. > > or > > FP = S*(1+r)^t - FVC in this formula you need the > rate and t to figure anything out, and even if > they were asking for S*(1+r)^t you need to add FVC > to FP to get some sort of answer which would not > match any of the answers. I still feel pretty good that the answer was B. Look at the formula FP = S*(1+r)^t - FVC again. I think S*(1+r)^t represents market value and you subtract the FVC from that to get the forward price. You could also subtract PVC but you need to multiply it by the discount rate, which gets you back to FVC again.
Market is always spot, that’s the definition of spot, I think it asked for t =0, in that case FVC and PVC must be equal, they were not, so question is wrong
Market is spot. There is no way spot times 1+r is market value, that makes no sense, because this would depend on time (t). So then you can have unlimited number of market values, when using vrious t’s.
jainan33 Wrote: ------------------------------------------------------- > Market is always spot, that’s the definition of > spot, I think it asked for t =0, in that case FVC > and PVC must be equal, they were not, so question > is wrong Exactly. I actually tried to infer (1+r)^t from PVC and FVC, but I ended up with none of the proposed answer.
Most of the test is a blur at this point… I remember my logic was the current value of the bond including coupons payment stream was the Market Price …and I thought the value asked for was the present value of the bond excluding the value of the coupon payments. I got A. The answer seemed too simple, so it is probably wrong
10056 or something like that i guessed. it was in between the smallest and largest answer.
I think we can safely assume that the answer was C. The question explicitly asked for the “No arbitrage price” of a forward contract. The inherent meaning being that we need to set the price such that an investor would be indifferent in owning the forward on the bond or owning the bond itself at time t = 0 (as that is when you would buy the forward or buy the bond). To do this it is clear, you take the current spot price minus the present value of the future cash flows. Normally, we do ( S - PVCF ) * ( 1 + r )^t to find this price. Alternatively we can do S * ( 1 + r )^ t - FVCF. Think about what these two equations do. In the 1st we take the present value of both the spot and the coupons and project it ‘forward’ into the future. In the second equation we take the spot and project it ‘forward’ into the future and then remove its future value of cash flow. In each case we are in sync. Intuitively , it makes little sense, to subtract the future value of the cash flows from the present value of the spot.