Question
Last month, a client of a major bank entered into a short forward contract on a US Treasury note. The bank took the other side
Last month, a client of a major bank entered into a short forward contract on a US Treasury note. The bank took the other side of the contract. The forward contract expires exactly two months from today and carries a delivery price of $1,100,000. The underlying US Treasury note was initially issued with a 10 year maturity, and it now has a maturity of 7 years and one month. The Treasury note has a face value of $1 million, and pays a semi-annual coupon of 2.5% (so, $12,500 every six months). The next payment by the bond is due in exactly 1 month. The spot price of the Treasury note today is $1,112,559.56. If the current continuously compounded risk-free rate of interest for all maturities is 1%, what is the current value of the forward contract to the bank?
The answer is F = $1,101,904.96.
Please show how to solve this.
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