Pricing and Valuation of Forward Commitments Flashcards
Forward Rate Agreement
Long
Floating Rate Receiver - Pays Fixed Rate
How does a forward contract look for a FRA 3 x 9 Contract
Forward Rate (3,6)
3 - Months from now
6 - Months duration
Forward Rate Agreement
Short
Fixed Rate Receiver - Pays Floating Rate
FRA Long Position Formula
Receives floating, pays fixed
NA( Floating - Fixed x (Days / 360) ) / (1+ Floating Rate x Days/360))
FRA short Position Formula
Short - Receive Fixed, Pay floating rate
[ Na x ( Fixed - Floating * Days /360] / (1+fixed * Days /360)
Formula for “Cost to purchase deliverable bond”
ST + AI
Bond present price + Accured Interest Interest
Formula for “Cost To Deliver”
CTD = ST - (Ft x CF)
Bond Present Value - (Forward Price x Conversion Factor)
Fixed Income Forward Price Formula
F0 = [(S0+AI)-I/(1+r)^t] x (1+r)^t - Accured Interest
Qouted Fixed Income Forward Fomula
QF0 = F0 /Conversion Factor
Formula For Currency Forward price
f/d
Ff/d = Sf/d x [(1+rf) ^t / (1+rd)^t]
Formula For Currency Forward price
d/f
Fd/f = Sd/f x [(1+rd) ^t / (1+rf)^t]
What will the Forward price be if
Rf = Rd
F0 = S0
What will the Forward price be if
Rf > Rd
Ff/d > Sf/d
Fd/f < Sd/F
What will the Forward price be if
Rf < Rd
Ff/d < Sf/d
Fd/f > Sd/f
What is the value of a forward and swap contract at time 0
Zero
No value
Receives fixed Rate, and pays floating is the same as
Long fixed bond and short floating bond
How to calculate PMT in Swap rate?
1 - Dfn / Sum of DF
Formula for Value of Interest Rate Swap
( R fixed 0 - R fixed 1) x Notional Amount x sum of DF
Who decideds which bond to deliver in a fixed income future contract
The seller after adjusting for conversion factor
Formula for Swap Value
(R0 - Rt+1) x Notional Amount x ∑DF
∑DF is based on the years remaning
What is the underlying in a interest rate swap
An interest rate
Formula for “Receive Equity” in equity swaps
(NA x P0 / Pt+1) - NA x (Rfix x ∑DF + DFn)
Company X is in the UK.
Company Y is in Japan.
They enter into a Fixed-for-Fixed currency Swap.
What kind of bond position is this similar to for both parties
Company X: Short a JPY bond and long GBP bond.
Company Y: Short GBP bond and Long JPY bond
Reason: They both have to make interest payment (short) in the counterparties currency, and receive (Long) interest payment of their domestic currency.
The value of a futuers contract is the difference between…
Future price at experation - Futurers price of the previous day
