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### 17 Cards in this Set

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 General Concepts: Fwd Price Price of underlying that allows no arbitrage, so they're valued at zero. This is a No Arbitrage Price Formula for FP FP = So x (1 x Rf)^T FP: Forward Price So: Spot Price Compound the Spot at the risk free rate Day count on zero coupon bonds 360 6m forward on zero-coupon bond, Currently selling for \$600 (1000 face), rf =3%, what's the future price? 600 x (1.03) ^ 6/12 \$608.93 Vt (value of long position during the life of a contract) Vt = St - (FP / (1 +Rf)^ T-t Value of Long position at maturity St - FP Value of underlying - Forward Price Formula (another method) You receive St You pay FP Value t: PV(St) - PV(FP) "spot price - PV of the forward price" Pricing Equity Forward Contracts (divs complicating feature) FP: (So - PVdivs) x (1+Rf)^t or... So x (1=Rf)^T -FVD Pricing equity fwd example: 90d equity fwd Stock @ 60 Rf=3% Div at day 60: 2.00 FP: (So - PVdivs) x 1+Rf^t PVdivs: 2.00 / (1+.03)^60/365 FP: (60-1.9903) x 1.03^90/365 Net investment's Future Value 58.43 is the zero arb fwd price Value an Equity Forward Contract after initation Vt (long) (St - PVdivs) - (FP / (1+Rf)^T-t) remember... discount FP by the days LEFT to expiry Pricing Equity Index Forward Contracts Think continuous dividend, just an offset to the cost of carry FP: So x e^(Rfc -Rfdiv yldc) x T 5% annual compounded rate ln(1.05) Continuously compounded: 4.879% Valuing Index Forward Contracts Vt (long) = (St / e^ dvld(cont) x (T-t) minus (FP / e^Rfc x (T-t) So / e^div yld x time left - FP / re^skfr(cont) x time left FRAs 1x3 FRA 30d rate 2.4% 90d rate 3.0% 1+Long ---------- -1 x 360/60 1+Short Longer rate: .03 x 90/360 Shorter rate: .024 x 30/360 1.0075 ----------- -1, then annualize 1.0002 Fwd rate: 3.293% Valuing a FRA, concepts Long FRA is bullish on rates Short FRA is bearing on rates FRA is you're Fixed Rate Payer rate, Pay Fixed, Received Floating Paid in arrears Carrying forward 1x3 FRA, we priced it at 3.3%, notional 1m 10 days in 20d libor: 2.5% (de-ann!) d.00139 80d libor: 3.3% (de-ann!) s.00733 Price a new FRA 80d/20d -1 x 60/360 1.00733 / 1.00139 -1: d.00593 ann (60): 3.56 New Rate - Locked in Rate (3.56 - 3.3) x 60/360 x 1m: \$433.33! Value at end of b&l period 433.33/ 80d 1.00733 = \$430.18!!! Valuing Currency Forwards: 1+RNum^ x/365 So x ______________ 1+RDen^ x/365 Valuing a Currency Forward Contract: St FP ___________ - ________ (1+Rdem)^T-t (1+Rnum)^T-t