An Investor entersinto a 9-month forward contract to sell a 10-year bond providing 8% annual coupons paid annually on a principal of 990. The first
An Investor entersinto a 9-month forward contract to sell a 10-year bond providing 8% annual coupons paid annually on a principal of 990. The first coupon payment is expected in 12 months. The current price of the bond is 870. The risk-free interest rates per annum are given in the following table:
Monthly | Rate | Compounding |
9 Months | 4% | continuous |
1 year | 4.3 | Bi-monthly |
2 year | 5.4 | Quarterly |
3 year | 6.1 | Annually |
4 year | 4.9 | Semi-annual |
5 year | 7 | Bi-annual |
6 year | 7.4 | Quarterly |
7 year | 7.3 | continuous |
8 year | 8.1 | Annually |
9 year | 8.6 | Monthly |
10 year | 9 | Bi-monthly |
a. What should be the delivery price for this contract?
b. What should be the value of the contract?
c. Are there any arbitrage opportunities if the forward price is 880? If so, show all the transactions needed to make this arbitrage opportunity. (You MUST show all the cash flows in the transactions).
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