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Pricing and Valuation of Forward and Futures Formula PDF
Pricing and Valuation of Forward and Futures Formula PDF
The first strategy (purchase of the underlying asset) is better than the second (purchase
of a forward contract) when
r t
(4) FM > F = S 1 + M - C t
360
or
F + C t 360
(5) rM < r = M - 1
S t
2
Derivatives on Financial Market 242391-0345
F = S0
(1 + i T )
N
(1 + i T )
Md
(9) N
Mf
where
S0 – the spot exchange rate,
N
i Md - nominal domestic interest rate,
N
i Mf - nominal foreign interest rate.
T – time to expiration.
The implied repo rate is:
FM (1 + i fN T )
− 1
S0
(10) id =
N
3
Derivatives on Financial Market 242391-0345
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Derivatives on Financial Market 242391-0345
Solution
(a)
The fair value is
F0 = S 0 (1 + i ) − D T = 1005,75
T
(b)
1005,75 - 1002 = 3,75
Sell the stock
Invest money
Buy forward
(c)
F(0, T )
V0 (0, T) = S 0 − = 3,73
(1 + r )T-t
Because the value is positive, the payment is made by the long.
(d)
DT F0M
Wt = S t − (T − t ) - = 97,13
(1 + i ) (1 + i )(T− t )
Gain to the long position, loss to the short.
(e)
Gain on asset 1200 - 1000,00 = 200,00
Value of forward 1200 - 1005,75 = 194,25 for long
The overall gain 5,75
5
Derivatives on Financial Market 242391-0345
360
n
Di
D0 = ∑ (1 + i )
i =1
Ti = 3,82
365 D0
δ= ln 1 + = 4,7355%
t S0 − D 0
6
Derivatives on Financial Market 242391-0345
(c)
The fair forward price can be calculated as:
r t
F 0 = S 0 1 + M - D 0 = 104,02
360
or F0 = [S 0 − D 0 ](1 + i )
T
= 104,02
F0 = S 0 (1 + i ) − D T
T
= 104,02
(c − δ )T
or F0 = S 0 e = 104,02
(d)
The implied repo rate is
F M + D T 360
r= 0 - 1 = 10,9542%
S0 t
365
rt t
i = 1 + −1 = 11,2136%
360
1
FM + DT T
or i = 0 - 1 = 11,2136%
S0
FM + DT
or ln 0
S0
c=
= 10,6283%
T
365 rt
c= ln1 + = 10,6283%
t 360
i = ec − 1 = 11,2136%
The arbitrage position would require buying a stock and selling a forward contract.
(e)
120 days later.
DT F 0M
Wt = St − (T − t ) -
(1 + i ) (1 + i )(T − t )
The stock price 80,00
The present value of dividends is equal to 1,92
The present value of forward price 99,24
-21,17
S t (1 + i )
or (T − t )
-DT F 0M F tM - F 0M
Wt = - =
(1 + i )(T − t ) (1 + i )(T − t ) (1 + i )(T − t )
FtM = 81,83
Wt = -21,17
(f)
ST - F0M = -2,02
7
Derivatives on Financial Market 242391-0345
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Derivatives on Financial Market 242391-0345
F = S0
(1 + i T )
N
(1 + i T )
Md
N = 4,676867 4,68822
Mf
Ad 2.
St F0
Wt = −
(1 + r ) f T1
(1 + r )T1
4,525191 - 4,540096 = -0,0149
Ad 3.
4,5000 - 4,6400 = -0,1400
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Derivatives on Financial Market 242391-0345
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Derivatives on Financial Market 242391-0345
142 82
Today Maturity of the
futures contract
The bond price with accrued interest
y
T
B c 1 + − 1 + y
2 Bca
P= T
+ = 107 + 3 28/32 = 110 28/32
y 365 3,8904 110,8803
y 1 +
2
(b)
The "fair" futures price The implied repo rate
r t Bc Bct 2 Bc rt 2 Bc Bct 2 Bc rt 2
P (1 + M ) - − − Ff + + + -P
360 2 365 2 360 2 365 2 360 360
F=
f r=
P t
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