LM 6: Pricing & Valuation of Futures Contracts Flashcards
What is the formula for pricing of futures contracts at inception?
f0 (T) = s0 (1+r) ^T
s0 = spot price
r = rate
T = time
What is the formula for pricing of futures contracts at inception with continuous compounding?
f 0 (T) = s0 e* e^(r*T)
What is the formula for pricing of futures contracts at inception if there are costs and benefits associated with contract?
f 0 (T) = (s0 + PV 0 (C) - PV 0 (I) ) * (1 + r) ^T
C= costs
I = benefits or income
What is the value of fowards contract formula before maturity but after inception?
V t (T) = st - F0 (T) * (1+r) ^ -(T-t)
What is the difference between pricing of futures contracts and forwards contracts?
forwards contract price set at initiation and stays consistent over life of contract
futures contract price is not constant during life of contract & price is marking to market daily (end of day if futures goes up 1 dollar, buyer credited 1 dollar and sell debited 1 dollar)
What is a floating rate agreement (FRA’s)?
allow counterparties to exchange future fixed for floating rate cash flows
What is the value of an interest rate futures contract formula?
futures contract value = notional principal * (1 + MRR / m (compound periods per year))
What is the basis point value (bpv) and formula?
for every move of market reference rate how much does the value of the futures contract change
Futures contract BPV = Notional principal * 0.0001 * period
What are the differences between futures and forwards contracts in terms of payoffs at maturity?
there are no differences, they have similar payoff at maturity
If there is not correlation between futures prices & interest rates what would happen between futures prices & forwards prices if interest rates were to rise?
there would be no difference if interest rates rose
futures prices = forward prices
If there is positive correlation between futures prices & interest rates what would happen between futures prices & forwards prices if interest rates were to rise?
future prices > forward prices
If there is negative correlation between futures prices & interest rates what would happen between futures prices & forwards prices if interest rates were to rise?
future prices < forward prices
Whats the effect of central clearing in OTC derivative?
if margin isn’t met, OTC will close position before maturity. it used to not close despite how negative the values were.
Whats the effect of central clearing in OTC derivative?
if margin isn’t met, OTC will close position before maturity. it used to not close despite how negative the values were.
