Forward and future contracts
Suppose that on January 10, a one-year default-free discount bond is available for $0.918329 per dollar of face value and a two-year default-free discount bond costs $0.836859 per dollar of face value.
Assuming that financial markets are perfect, suppose you want to own $1.5M face value of 1-year discount bonds in one year and you want to pay for them in one year a price you know today.
Design a portfolio strategy that achieves your objective without using a forward contract.
Suppose that you learn that the forward price of 1-year discount bonds to be delivered in one year is $0.912 per dollar of face value.
What is the price today of a portfolio that replicates a long position in the forward contract?
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Solution Summary
Forward and future contracts are examined. The expert designs a portfolio strategy that achieves the objective without using a forward contract.