Forward Markets And Contracts

Question 0

Value of forward contract

Answer 0

Money counterparty would pay or receive to terminate contract

Question 1

What is price of forward contract

Answer 1

Price at which long and short agree to trade underlying asset at expiry

Question 2

No arbitrage price

Answer 2

Price at which value of long side and short side both equal zero

FP = S0*(1+Rf)^T

Question 3

Price of long forward at initiation

Answer 3

Zero (priced to prevent arbitrage)

Question 4

Price of long forward during contract life

Answer 4

St - ( FP )
———–
(1+Rf)^T-t

Question 5

Price of long forward at expiration

Answer 5

St - FP

Question 6

Value of short is the _____ of the long position

Answer 6

Negative

Question 7

Forward price on a stock

Answer 7

FP(on stock) = (S0 - PVD)*(1+Rf)^T

= S0*(1+Rf)^T - FVD

Question 8

Value of long position on dividend paying stock

Answer 8

Vt (long position on stock)

= (St - PVDt) - (FP / (1+Rf)^T-t)

Question 9

Forward price on equity index

Answer 9

FP(equity index) = S0 * e^(Rf-div yield)*T

Question 10

Value of long position on equity index

Answer 10

Vt = St - FP
——— ———
e^8c(T-t) e^Rf(T-t)

8 = dividend yield

Question 11

Forward price on fixed income security

Answer 11

FP (fixed income security)

= (S0 - PVC) * (1+Rf)^T

Question 12

Value of long position on fixed income security

Answer 12

Vt = (St - PVCt) - (FP/(1+Rf)^(T-t))

Question 13

How does a forward rate agreement (FRA) work

Answer 13

Long borrows money
Contract price int rate on loan
If LIBOR > specified rate, borrow at lower rate
If rate lower, still pay specified rate

Question 14

Describe notation for FRA

Answer 14

2x3 = contract expires in two months, underlying loan settled in three months

Start borrowing at month two
Loan matures at month three

Question 15

Steps to value an FRA 40 days after initiation

Answer 15

1. Calculate implied 30day forward rate at settlement (20 days away)
2. Calc value of FRA at maturity (notional principal * step1-original FRA price)
3. Discount step 2 value to present

Question 16

Pricing and valuation of currency forward contract is an application of ________ from international parity relations

Answer 16

Covered interest parity

Question 17

Forward price of currency forward contract

Answer 17

Ft = S0* e^(Rdc - Rfc)*T

Question 18

Value of currency forward contract

Answer 18

Vt = St /(1+Rfc)^(T-t) - Ft / (1+Rdc)^(T-t)

Question 19

Value an FRA after initiation

Answer 19

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

Question 20

FP of FRA

Answer 20

FRA(0,h,m) = [(1+r(h+m)(h+m)/360)) / (1+r(h)h/360)) -1] * 360/m

Question 21

Value FRA at expiration

Answer 21

Vt = (r(m) - FRA(0,h,m))(m/360)
————————–
1 + r(m)m/360

Question 22

FP of currency contract if exchange rates are constant

Answer 22

F(0,T) = S0/(1+r for)^T * (1+r dom)^T

Question 23

Value of exchange contract during life

Answer 23

V = St / (1+r for)^(T-t) - F(0,T)/(1+r dom)^(T-t)