Reading 49. Basics of Derivative Pricing and Valuation
Learning Outcome Statements
b. distinguish between value and price of forward and futures contracts;
CFA Curriculum, 2020, Volume 6
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Subject 2. The Concept of Pricing vs. Valuation
Two parties agree to a forward contract to deliver a zero-coupon bond at a price of $97 per $100 par in 3 month.
At initiation date:
- Value: 0
- Price: $97
At the contract's expiration, suppose the underlying zero-coupon bond is selling at a price of $97.25. The long is due to receive from the short an asset worth $97.25, for which a payment to the short of $97 is required.
- Value: $0.25
- Price: $97
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The example given in the textbook is wrong. No rational investor will never hold a stock priced at $102 today, and buy a forward contract to sell it at $100 one year from now. Why would the investor sell the stock now and deposit the $102 in the bank? In one year the investor would get $102 + risk-free interest.
what if, it is probable that the stock price will fall below $100.So forward contract is wise enough here and with in a year investor can earn a interest of $4.08. depositing some where else for risk free rate.
Jiba. The assumption of textbook is just that an investor owns a stock and a forward contract at t=0. Then, they give us a way to differentiate forward contract value at that time and its fixed price at initiation . To determinate V0, you have to assume the hedging. Never mind that the investor is rational or not.