LM 5: Pricing & Valuation of Forward Commitments Flashcards
What is the forward contract at maturity formula for the long party, and for the short party?
long party = vT (T) = sT - f0 (T)
short party = vT (T) = f0 (T) - sT
vT (T)value at maturity
sT = spot price
f0 (T) = forward price
What is the value of the currency forward contract formula for before maturity but after initiation without additional costs and benefits? ?
Vt (T) = St - F0 (T)* (1+R) ^ -(T-t)
St = current stock price
F0 (T) = forward price
T- t %= time of total contract - time of how long you’ve had contract
What is the value of the forward contract formula for before maturity but after initiation if with additional costs or benefits?
Vt (T) = (St - PV t (I) + PV t (C)) - F0 (T)*(1+r)^ - (T-t)
St = current stock price
PV t (I) = benefits associated with holding the underlying asset
PV t (C) = costs associated
F0 (T) = forward price
What is the value of the currency forward contract formula after initiation but before maturity?
Vt (T) = St f/d - F0 fd (T) e^-((rf-rd)*(T-t))
St f/d = current exchange rate
f0 f/d (t) = forward rate
rf - rd = foreign - domestic
What is spot rate & another name for spot rate?
current market rate
aka zero rate
What is one year spot rate formula given coupon rate and price?
PV = (coupon payment + par value) / (1+ spot rate)
What is the 2 year spot rate formula given coupon rate and price?
PV = ((year 2 coupon payment) / (year one spot rate + 1)) + ((par value + annual coupon) / (1 + spot rate) ^2))
What is the 3 year spot rate formula given coupon rate & price?
PV = ((year 3 coupon payment) / (year 1 spot rate + 1)) + ((year 3 coupon payment) / (1 + year 2 spot rate)^2) + ((par value + annual coupon) / ( 1 + spot rate) ^3)
What is discount factors & formula?
used to determine the present value of a cash flow to be received in the future
DFt = 1 / (1+zt)^t
zt = spot rate
What is implied forward rate & formula?
rate required to ensure that one bill held for one year has the same rate as Bond A being held 3 months, and Bond B being held 9 months
IFR A, B-A = [ ((1+ spot rate b) ^B) / ((1+ spot rate A) ^A) ] ^ 1/(B-A) -1
According to market convention, the forward rate for a one-year loan to be initiated in three years and maturing four years from today is most likely denoted as:
a. F1, 3
b. F1,4
c. F3,1
Forward interest rate notation specifies the length of the forward period and the term of the underlying rate. In this example, the rate for a three-year forward period and a one-year loan would be denoted as F3,1.
What is the negotiated price of a forward contract?
fixed price at which the underlying will be purchased or sold at expiration
In a swap agreement what do the payers vs receivers pay?
payer: pays fixed rate to receiver
receiver: pays floating rate to payer
