Quantitative Methods in Finance

rward contract was valued in an asset that does not pay dividends whin the construction of 2 portfolios and using the concept of nontrage. i) Assume that the underlying pays a fixed income at some point during the life of the forward contract and denote C the present value of this fixed income. Adequately modifies one of the portfolios and values the forward. Assume that the underlying pays dividends. The time value of the dividend is given by the process BE(t,T). Specifically, if at time t we have A units of the underlying, then at time T we would have BE1(t,T)A underlying units. Modifying one of the portfolios shows that a forward contract with delivery price K and maturity date T has value present S0BE(0,T)KB(0,T) with S0 the spot price. What is the forward price? We can use b) to value forwards in the exchange rate. Specifically, S0 is the current peso/dollar exchange rate, K the agreed rate, B(t,T) the value at peso time (process account value in cash in pesos) and BE(t,T) the corresponding one for dollars. In this case the value of K for which the con-deal has present value 0 , is known as the forward rate. Suppose that the current rate is 12.2 pesos per dollar. The price of a bond with 180 days worth cover 100 pesos is 99.48 pesos. Th price of the equivalent instrument with face value 100 dollars is 99.46 dollars. What is the exchange rate forward of 180 days that our theory predicts? If the forward exchange rate of 180 days in the market is 12.1 pesos per dollar, we have an opportunity of arbitration (it's below the theoretical). Build a free strategy risk taking advantage of this situation