Forward Markets And Contracts Flashcards
Value of forward contract
Money counterparty would pay or receive to terminate contract
What is price of forward contract
Price at which long and short agree to trade underlying asset at expiry
No arbitrage price
Price at which value of long side and short side both equal zero
FP = S0*(1+Rf)^T
Price of long forward at initiation
Zero (priced to prevent arbitrage)
Price of long forward during contract life
St - ( FP )
———–
(1+Rf)^T-t
Price of long forward at expiration
St - FP
Value of short is the _____ of the long position
Negative
Forward price on a stock
FP(on stock) = (S0 - PVD)*(1+Rf)^T
= S0*(1+Rf)^T - FVD
Value of long position on dividend paying stock
Vt (long position on stock)
= (St - PVDt) - (FP / (1+Rf)^T-t)
Forward price on equity index
FP(equity index) = S0 * e^(Rf-div yield)*T
Value of long position on equity index
Vt = St - FP
——— ———
e^8c(T-t) e^Rf(T-t)
8 = dividend yield
Forward price on fixed income security
FP (fixed income security)
= (S0 - PVC) * (1+Rf)^T
Value of long position on fixed income security
Vt = (St - PVCt) - (FP/(1+Rf)^(T-t))
How does a forward rate agreement (FRA) work
Long borrows money
Contract price int rate on loan
If LIBOR > specified rate, borrow at lower rate
If rate lower, still pay specified rate
Describe notation for FRA
2x3 = contract expires in two months, underlying loan settled in three months
Start borrowing at month two
Loan matures at month three
Steps to value an FRA 40 days after initiation
- Calculate implied 30day forward rate at settlement (20 days away)
- Calc value of FRA at maturity (notional principal * step1-original FRA price)
- Discount step 2 value to present
Pricing and valuation of currency forward contract is an application of ________ from international parity relations
Covered interest parity
Forward price of currency forward contract
Ft = S0* e^(Rdc - Rfc)*T
Value of currency forward contract
Vt = St /(1+Rfc)^(T-t) - Ft / (1+Rdc)^(T-t)
Value an FRA after initiation
V = 1/(1+r(h-g)((h-g)/360 - (1+FRA(0,h,m)(m/360)) / (1+r(h+m-g)*(h+m-g)/360))
h = expiration (when it starts) m = term of FRA
FP of FRA
FRA(0,h,m) = [(1+r(h+m)(h+m)/360)) / (1+r(h)h/360)) -1] * 360/m
Value FRA at expiration
Vt = (r(m) - FRA(0,h,m))(m/360)
————————–
1 + r(m)m/360
FP of currency contract if exchange rates are constant
F(0,T) = S0/(1+r for)^T * (1+r dom)^T
Value of exchange contract during life
V = St / (1+r for)^(T-t) - F(0,T)/(1+r dom)^(T-t)
