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2. Forward Contracts, Forward Discount factor and Forward Rates - 20 Points Suppose the discount factors for years 1,...,5 as follows: Discount Factor 1 2
2. Forward Contracts, Forward Discount factor and Forward Rates - 20 Points Suppose the discount factors for years 1,...,5 as follows: Discount Factor 1 2 3 4 5 0.9901 0.9884 0.9764 0.9614 0.9507 (aConsider a (long) forward contract initiated at time 0 for the delivery in year 2 at a price FA of a (then) 2-year zero. What should be the delivery price F4 set at time 0? (b) Consider a (long) forward contract initiated at time 0 for the delivery in year 3 at a price fo of & (then) 2-year 10% coupon bond with face value of $1,000. What should be the delivery price Fg set at time 0? (c) Computo at time 0 the forward discount factor for the periods [u, ix + 1 where u = 1, ..., 4 and denoted by Dutt (d) Compute at time 0 the annually compounded forward rates for the perioda [u, u +1 where u-1,...,4 and denoted by for (e) Compute at time 0 the continuously compounded forward rates for the periods u, u + 1] where u= 1,..., 1 and denoted by +1. 2 2. Forward Contracts, Forward Discount factor and Forward Rates - 20 Points Suppose the discount factors for years 1,...,5 as follows: Discount Factor 1 2 3 4 5 0.9901 0.9884 0.9764 0.9614 0.9507 (aConsider a (long) forward contract initiated at time 0 for the delivery in year 2 at a price FA of a (then) 2-year zero. What should be the delivery price F4 set at time 0? (b) Consider a (long) forward contract initiated at time 0 for the delivery in year 3 at a price fo of & (then) 2-year 10% coupon bond with face value of $1,000. What should be the delivery price Fg set at time 0? (c) Computo at time 0 the forward discount factor for the periods [u, ix + 1 where u = 1, ..., 4 and denoted by Dutt (d) Compute at time 0 the annually compounded forward rates for the perioda [u, u +1 where u-1,...,4 and denoted by for (e) Compute at time 0 the continuously compounded forward rates for the periods u, u + 1] where u= 1,..., 1 and denoted by +1. 2
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