Current value of FRA You have entered into the 69 FRA of Question 20 at the rate of 6%. After three months, the FRA is now a 3 °ø 6 FRA. If the three-month Libor rate is 5%, and the six-month Libor rate is 7%, what is the current value of the FRA? Assume that the number of days in the first three months is 92. Discuss Investment assets vs. consumption assets · Short selling · Assumptions and notations · Forward price for an investment asset that provides no income · Forward price for an investment asset that provides a known cash income · Forward price for an investment asset that provides a known dividend yield · Valuing forward contracts · Forward prices and futures prices · Stock index futures · Currency futures · Illustrate Commodity futures ·
Current value of FRA Cost of carry · Investment assets vs. consumption assets An investment asset is an asset that is held mainly for investment purpose, for example, stocks, bonds, gold, and silver A consumption asset is an asset that is held primarily for consumption purpose, for example, oil, meat, and corn · Short selling an asset that is not owned · Assumptions and notations Assumptions Perfect capital markets: transaction costs are ignored, borrowing and lending rates are the same, taxes are ignored (or subject to the same tax rate), and arbitrage profits are exploited away Arbitrage profit is the profit from a portfolio that involves 1. Zero net cost 2. No risk in terminal portfolio value 3. Positive profit Notations T: time until delivery date (years) S0: spot price of the underlying asset today F0: forward price today = delivery price K if the contract were negotiated today r: zero coupon risk-free interest rate with continuous compounding for. Current value of FRA Cost of carry · Investment assets vs. consumption assets an investment asset is an asset that is held mainly for investment purpose, for example, stocks, bonds, gold, and silver A consumption asset is an asset that is held primarily for consumption purpose, for example, oil, meat, and corn · Short selling an asset that is not owned · Assumptions and notations. Use APA referencing style.