Derivatives

[tsv]

Hi,

another bad wording in the question:

Which of the comments made by Kozorez regarding arbitrage is least likely correct?

1. Comment 2
2. Comment 3
3. Comment 1
   Comment 1: A forward commitment is a derivative instrument in the form of a contract that provides the ability to lock in a price or rate at which one can buy or sell the underlying instrument at some future date or exchange an agreed-on amount of money on a series of dates. Comment 2: There is a difference between the pricing and the valuation of forward commitments. Pricing involves determining the appropriate forward commitment price or rate, typically after it has been initiated. Valuation involves determining the appropriate rate of the forward commitment when initiating the contract. Comment 3: The two fundamental rules of arbitrage are that one does not use any of one’s own money in a transaction, and one does not take any price risk.

Comment 2 is least likely correct yes, but look at the bold part of Comment 1 as well - actually forward commitments are contracts entered into between two parties that require both parties to transact in the future at a pre-specified price known as the forward price. In comparison - contingent claims confer a right to transact, but not an obligation…

[tsv]

And another question from Derivatives:

when calculating the value of a let`s say 1-year quarterly fixed for floating IRS, initiated 90 days ago, what we need to do is to compare the fixed rate of the initial IRS and the fixed rate now (90 days later) in order to offset it and to use the discount factors for the difference between old (1-year IRS) and the new (270-day IRS): why we discount as well the “principal” of the fixed bond?

I mean, if we have to find the PV of the bond, of course we discount the last coupon PMT together with the principal, but on the other hand the IRS (in comparison with currency swaps) does not involve exchange of notional at the beginning and at the end…

Thanks for sharing your thoughts