Hi All, I got problems in determine if the value of forward/future contract should I discounted back or not discounted back or should I should the Present Value of Future Value …really give me a hard time to understand this.
For example for interest rate FRA, we discounted back the FRA value with the discounted factor or floating rate, Fix Income and equity forward we use the FV, and for currency we need to discounted back (PV). Can someone help me to understand this? I don’t like to memorising it, I just want to get the logic.
For example: You sign into a FRA 2x5, which means you will borrow a 3-month loan after 2 months. Thus the exercise date of the forward is end of the second month and you need to determine the price at that time. However you will receive the payoff at the ending of 5th month, that’s why the value need to be discounted to ending 2nd month.
In other case, payoff is paid at exercise date, so no discount is needed
Only to some extent correct imho. If you are looking for the value of a forward contract, it will usually be the current value at some point t before expiration. This means that if you calculate the value at expiration, you will need to discount back to t.
For all forward contracts, Vt,(T) = [Ft,(T) - T0,(T)] / [(1+r)^(T-t)] meaning you always discount.
thanks all, I already figured it out. For the “value” of forward contract you need to discounted back to the time when you are reviewing it (eq: when there is another similar in the market). But to calculate the “price” of the forward contract you just need to find the future value.
Another qns is For Fix Income (bond) future, is the price is quoted price or full price when I say: currently in the market there is a bond with price xxx, 7% annual coupon, fair value is 100 par? as in the TT (Topic Test).
I dont remember that Fixed Income level 2 requires us to distinct between clean (quoted) price and dirty (full) price. Could you quote the full question here?