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11 Cards in this Set

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Contango

=futures price > spot price




-> most likely scenario

Backwardation

=futures price < spot price




-> will occur if benefits holding assets are large enough

Convergence

As maturity approaches, futures price converges towards spot price (due to no arbitrage)

Futures Price vs. Forward Price

-No arbitrage pricing applies to both


-Investors preference for mark-to-market feature could make futures more(/less) valuable than forwards


-Value of futures contract reset to 0 at the end of each trading day

Equity Forward

=(S0 - PVDividend) * (1+Rf)^T


Step1= FP/(1+Rf)^T=(S0 - PVDividend)


Step 2= (S0 - PVDividend)- (FP/(1+Rf)^T)=0

Currency Forward

=S0 *[((1+Rf quoted)^T)/((1+Rf base)^T)]


Step 1= FP/(1+Rf quoted)^T = S0/(1+Rf base)^T


Step 2=[S0/(1+Rf base)^T]-[FP/(1+Rf quoted)^T ]=0

Swap spread

= difference between the fixed rate on an interest rate swap and a Treasury bond of maturity equal to that of the swap

Forward Price on Fixed Income Security

=[bond price *((1+Rf)^T)-FVC]


=(bond price-PVC)(1+Rf)^T

Discount Factor

Example


LIBOR180 =1/[1+(LIBOR180 rate*(180/360))]

PV of fixed payments per notional$

=SPF(P1+P2+.....+Pz)+PZ




SPF=coupon * 1/payments per year

Value to fixed rate payer

=(PV of floating rate - PV of fixed rate) *notional amount