The target does not generate cash flow

Target generates cash flow

The monetary value of a forward contract at a certain time point t after signing and before expiration.

Beginning of period

Midterm

End of term

C is coupon

The buyer of the FRA fixes the interest rate on future borrowings

Long position fixed payer, fixed payer, floating float receiver

a×b FRA

Find the forward interest rate

When t=a

when t<a

Bond prices are usually net

According to the cheapest deliverable principle, it is necessary to ensure that the delivery price of deliverable bonds is the same

Accrued interest

Full price

formula

One party pays a fixed payment and one party pays a floating payment.

There is no exchange of nominal principal at the beginning of the period, the same currency

Interest netting

A fixed interest rate causes the contract value to be 0 at the beginning of the period

Pricing is to find the fixed interest rate

fixed rate is swap rate

Principle: A fixed-rate bond and a floating-rate bond are valued separately and subtracted.

method 1

Method 2

The price difference between bonds of two different currencies must be unified into the same currency

Long on bonds denominated in Currency A Short on bonds denominated in Currency B

Notional principal is exchanged at both the beginning and end of the period

Interest payments are not netted

The difference between the two discounted cash flows

Loss on swap in or swap out

Equity return versus fixed interest rate

Equity Earnings vs. Floating Rates

Equity income versus another equity income

Receive fixed income and pay equity income to one party

Receive floating amount and pay equity income to one party

Equity and equity swaps

Valuation steps

American options

The probability of a call option being exercised at expiration

The probability of a put option being exercised at expiration

Ignore margin and mark-to-market

nature

delta hedging