On the same graph, show the exact price and approximate prices. What do you see? What...

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On the same graph, show the exact price and approximate prices. What do you see? What can we conclude about the effectiveness of the duration? Question 5.2 The most actively traded product in the Montreal Exchange is BAX. This derivative is a futures contract whose underlying is the interest rate of acceptances due 3 months. This product is similar to the popular Eurodollar futures traded at the Chicago Mercantile Exchange. The only notable difference between Eurodollar futures and BAX is underlying rate which is, obviously, a Canadian rate for BAX. This rate is determined from the convention actual/365 and it is a rate expressed on an annual basis with quarterly compounding. The terms of the Eurodollar futures (and similarly those of BAX) are described in detail in Section 6.3 of the textbook. The Excel file associated with this assignment contains data on the settlement prices of BAX traded to Montreal. a) What would have happened on March 19 in an individual who has taken on January 2, a long position in a BAX maturing March 19 and would have kept this position until maturity, i.e. will there be an exchange of goods? If yes, what will be exchanged, and if not, what will happen (hint: see page 35, section Cash Settlement)? b) Given the settlement prices given in your Excel file, calculate the forward interest rate for each date and each contract. c) How can we interpret the rate calculated in b) on January 2 for the contract expiring on March 19? How is it compounded? (Be sure to read the preamble above.) On the same graph, show the exact price and approximate prices. What do you see? What can we conclude about the effectiveness of the duration? Question 5.2 The most actively traded product in the Montreal Exchange is BAX. This derivative is a futures contract whose underlying is the interest rate of acceptances due 3 months. This product is similar to the popular Eurodollar futures traded at the Chicago Mercantile Exchange. The only notable difference between Eurodollar futures and BAX is underlying rate which is, obviously, a Canadian rate for BAX. This rate is determined from the convention actual/365 and it is a rate expressed on an annual basis with quarterly compounding. The terms of the Eurodollar futures (and similarly those of BAX) are described in detail in Section 6.3 of the textbook. The Excel file associated with this assignment contains data on the settlement prices of BAX traded to Montreal. a) What would have happened on March 19 in an individual who has taken on January 2, a long position in a BAX maturing March 19 and would have kept this position until maturity, i.e. will there be an exchange of goods? If yes, what will be exchanged, and if not, what will happen (hint: see page 35, section Cash Settlement)? b) Given the settlement prices given in your Excel file, calculate the forward interest rate for each date and each contract. c) How can we interpret the rate calculated in b) on January 2 for the contract expiring on March 19? How is it compounded? (Be sure to read the preamble above.)

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