Question #16 - Reading 30 Pricing and Valuation of Forward Commitments

Reading: Reading 30 Pricing and Valuation of Forward Commitments

PDF File: Reading 30 Pricing and Valuation of Forward Commitments.pdf

Page: 7

Status: Unattempted

Shared Context

- Comment 1 is best described as: A) correct. B) incorrect as the value of the futures contract should be negative after marking to market. C) incorrect as the value of the futures contract should be zero after marking to market.

Question

Using Exhibit 1, the quoted price of the Treasury bond futures contract should be closest to:

Answer Choices:

A. $941

B. $975

C. $1,100

Explanation

An investor of the Treasury bond will receive one semi-annual coupon in 0.5 years from now (or 0.2 years before maturity). At expiration of the futures contract, the CTD bond will have 0.2 years of accrued interest. FV of coupon (FVC) = $25 × 1.03(0.7 – 0.5) = $25.15 AIT = 0.2 / 0.5 × $25 = $10 QFP = {(full price) × (1 + Rf)T – AIT – FVC)(1 / CF) = [$1030(1.03)0.7 – 10 – 25.15](1 / 1.08) = $941.10 (Module 30.3, LOS 30.d) Typesetting math: 100%

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