I’m a bit confused on this problem EOC#8 from Reading 47 on Forward Markets and Contracts. It is in regards to Bonds spot price and the No Arbitrage Forward Price. Here is what I understand in terms of just the basics of forward contracts and choosing to long/short position:
If current forward price > no -arbitrage forward price <=> investor should short the current forward contract and purchase the security at the spot price.
If current forward price < no-arbitrage forward price <=> investor should long the current forward contract and short the security at the spot price.
However, I came across EOC#8 in Reading 47 for a bond problem:
The bond with accrued interest is currently > no-arbitrage forward price.
The problem did not mention anything regarding the forward contract price, so I can’t really tell whether this contract is overpriced or underpriced. I assume that the bond price being listed is the spot price, therefore in my mind, I see it as:
Bond price (spot) > no-arbitrage forward price, however, I do not understand why the investor should “enter into a forward contract, locking in the price at which he can sell (or short) the bond in 365 days”. Shouldn’t the investor short the current bond price instead and enter long into the forward contract since it is lower than the bond price?