Valuation Fwd Contracts

Question 1

Maturity and MtM formulas

Maturity (you are putting price, should have a surplus over your cost. Add cost)

Answer 1

MtM
Vt = St - Fo(T) (1+Rf) ^ - (T-t)

T = final date
t = “spot date”

Or

Vt(T) = St - Fo(T)
———-
(1+Rf) ^ (T-t)

Fo

———————————————
Maturity

Vo (T) = So - Pvo(Income) + Pvo (costs) (1+Rf) ^ T

Vt(T) = [St + Pv (costs) - Pv Benefit] - Fo(T)
————
(1+Rf)^ (T-t)

Question 2

Most common use for fwd rate contract (FRA)

Answer 2

Lock in a rate for borrowing or lending

Question 3

Borrowing and lending dynamics

Answer 3

Borrowing - pay fixed, received variable

Lending - pay variable, received fixed