Hi everyone,
I understand correctly futures & forwards pricing but i do not get it when it concerns monetary assets such as bonds. My question is very simple but can’t find the answer. For example : Calculate the no-arbitrage futures price of a 1.2 year futures contract calling for the delivery of a specific bond, a 7% T-bond with exactly 10 years remaining to maturity and a price of $1,040, when the annual risk-free rate is 5%. I calculate the future price of the 10 years bond in 1.2 years (8,8 years remaining) ? OR i calculate the future price of a 10 years bond starting in 1.2 years ? Thank you very much…
The maturity of the bond is irrelevant. What matters is its price today (the price already captures its maturity). So all you need is the maturity of the forward , as in any other forward, to raise to the power.
F=1040 x 1.05^1.2
Your worries will probably materialize in FRA, Forward Rate Agreements, where there are two time periods to figure out.
You forgot to remove the value of the interim coupons that you won’t receive.
Thank you but I still dont get it. If it is a future on a stock, the stock currently exists… if it is forward rate agreement, the contract will exist at the forward expiration only…
When it is for a bond… both seems possible to me : A trader may want to buy forward a 10 years bond starting in 1.2 years Or this trader may want to buy forward a 10 years bond starting today, in 1.2 years ! I suppose both can be computed, but i don’t understand what i am asked to compute !
Aah, my bad. Deduct the PV of two coupons from the price