Question #25

Reading: Reading 30 Pricing and Valuation of Forward Commitments

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

Page: 11

Status: Unattempted

Part of Context Group: Q24-25
Shared Context
- For a futures contract on an asset with no storage costs, convenience yield, or other expected cash flows over the term of the contract, there should be a: A) positive correlation between the futures price and interest rates and a negative correlation between the futures price and the spot price. B) negative correlation between the futures price and interest rates and a positive correlation between the futures price and the spot price. C) positive correlation between the futures price and both interest rates and the spot price.
Question
The no-arbitrage futures price of the Euro-bond contract is closest to:
Answer Choices:
A. €94.83
B. €102.85
C. €110.61
Explanation
Typesetting math: 100% There will be 2 seminauunual coupon payments during the life of the futures contract: one in 6 months (t=0.5, T-t = 0.7) and one in one year (t=1, T-t = 0.2). Full price = €104.10 (since the bund just paid coupon, AI0 = 0) Step 1: compute the FV of 2 coupons: FVC = (1.25 × (1.01)0.7) + (1.25 × (1.01)0.2) = 2.51 Step 2: Compute Quoted Future price: QFP = [bund price × (1 + Rf)T − AIT - FVC] /CF = (104.10 × (1.01)1.2 − 0.42 – 2.51)/1.08 = €94.83
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