Question #15
Reading: Reading 30 Pricing and Valuation of Forward Commitments
PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf
Page: 7
Status: Unattempted
Part of Context Group: Q15-16
First in Group
Shared Context
Question
Comment 2 is best described as:
Answer Choices:
A. correct
B. incorrect as the full price should be the clean price less the current accrued interest
C. incorrect as the accrued interest at expiration should be deducted from the future value of full bond price in arriving at the quoted futures price
Explanation
The quoted (clean) price of the futures contract is the future value of the full price of the
cheapest to deliver bond less accrued interest (since last coupon) and the future value any
coupon payment received during the life of the contract and then adjusted for the
appropriate conversion factor.
QFP = {(full price) × (1 + Rf)T – AIT – FVC)(1 / CF)