Forwards

Question 1

Formula for forward contract price

Answer 1

FP = S x (1+Rf)^T

Question 2

What is the arbitrage process for an overpriced forward?

Answer 2

Short forward, long spot asset, borrow money

Question 3

What is the arb process for underpriced forwards

Answer 3

Long forward, short asset, lend money

Question 4

Value of long forward (no dividends or coupons) at any time t formula:

Answer 4

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

Question 5

Value of long equity forward formula

Answer 5

(So - PV Div) x [FP / (1+Rf)^T-t] or [So x (1+Rf)^T]-FV Div

Question 6

When to use 360 vs 365 day count basis?

Answer 6

T Bills and LIBOR rates, sign to use 360. FRAs, Swaps, LIBOR based instruments, T Bills. For others use 365

Question 7

Formula for cont compounded Rf

Answer 7

Rcf = ln(1+Rf)

Question 8

Value of long forward on equity index formula:

Answer 8

[St/ e^(dc x (T-t))] - [FP/ e^(Rcf x (T-t))]

Question 9

Price of long forward on equity index formula:

Answer 9

St x e^(Rcf - dc) x T

Question 10

Currency Forward Price:

Answer 10

Ft = So x [(1+Rdc)^T] / [(1+Rfc)^T]

Question 11

Currency Forward Value formula:

Answer 11

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