Question: This exercise uses the data in Table 1. On February 15, 1994, a company wanted to sign a forward contract to purchase a five-year treasury
This exercise uses the data in Table 1. On February 15, 1994, a company wanted to sign a forward contract to purchase a five-year treasury bond, with a coupon rate of 5.75% and a par value of $100 within two years.
| Table : Semi-annually Compounded Yield Curves | ||||||
| Panel A : Yield Curve | ||||||
| Date | 1994-02-15 | 1994-02-16 | 1994-02-17 | 1994-02-18 | 1994-02-22 | 1994-02-23 |
| 1994-05-15 | 3.32% | 3.44% | 3.56% | 4.07% | 2.90% | 2.90% |
| 1994-08-15 | 3.34% | 3.34% | 3.46% | 3.30% | 3.24% | 3.29% |
| 1994-11-15 | 3.55% | 3.59% | 3.45% | 3.47% | 3.41% | 3.46% |
| 1995-02-15 | 3.61% | 3.64% | 3.67% | 3.83% | 3.82% | 3.94% |
| 1995-05-15 | 3.76% | 3.78% | 3.80% | 3.87% | 3.96% | 4.11% |
| 1995-08-15 | 3.93% | 3.93% | 3.99% | 4.07% | 4.09% | 4.19% |
| 1995-11-15 | 4.02% | 4.04% | 4.11% | 4.18% | 4.21% | 4.34% |
| 1996-02-15 | 4.23% | 4.23% | 4.31% | 4.30% | 4.40% | 4.50% |
| 1996-05-15 | 4.33% | 4.33% | 4.40% | 4.46% | 4.48% | 4.58% |
| 1996-08-15 | 4.37% | 4.37% | 4.45% | 4.50% | 4.48% | 4.56% |
| 1996-11-15 | 4.51% | 4.52% | 4.61% | 4.65% | 4.65% | 4.75% |
| 1997-02-15 | 4.56% | 4.56% | 4.64% | 4.69% | 4.67% | 4.76% |
| 1997-05-15 | 4.70% | 4.71% | 4.79% | 4.86% | 4.84% | 4.93% |
| 1997-08-15 | 4.79% | 4.79% | 4.88% | 4.94% | 4.94% | 5.02% |
| 1997-11-15 | 4.89% | 4.88% | 4.97% | 5.04% | 5.01% | 5.13% |
| 1998-02-15 | 4.95% | 4.94% | 5.05% | 5.12% | 5.11% | 5.16% |
| 1998-05-15 | 5.00% | 5.00% | 5.11% | 5.18% | 5.16% | 5.25% |
| 1998-08-15 | 5.08% | 5.09% | 5.20% | 5.28% | 5.25% | 5.33% |
| 1998-11-15 | 5.13% | 5.13% | 5.25% | 5.31% | 5.29% | 5.37% |
| 1999-02-15 | 5.20% | 5.20% | 5.32% | 5.38% | 5.36% | 5.45% |
| 1999-05-15 | 5.24% | 5.25% | 5.36% | 5.43% | 5.41% | 5.49% |
| 1999-08-15 | 5.25% | 5.25% | 5.37% | 5.43% | 5.41% | 5.50% |
| 1999-11-15 | 5.32% | 5.31% | 5.43% | 5.51% | 5.48% | 5.57% |
| 2000-02-15 | 5.36% | 5.36% | 5.46% | 5.55% | 5.55% | 5.62% |
| 2000-05-15 | 5.40% | 5.41% | 5.51% | 5.60% | 5.59% | 5.66% |
| 2000-08-15 | 5.46% | 5.47% | 5.57% | 5.66% | 5.65% | 5.68% |
| 2000-11-15 | 5.51% | 5.52% | 5.62% | 5.76% | 5.69% | 5.78% |
| 2001-02-15 | 5.53% | 5.56% | 5.67% | 5.74% | 5.71% | 5.79% |
| 2001-05-15 | 5.58% | 5.59% | 5.70% | 5.78% | 5.78% | 5.86% |
| 2001-08-15 | 5.60% | 5.63% | 5.71% | 5.82% | 5.82% | 5.90% |
| 2001-11-15 | 5.67% | 5.69% | 5.78% | 5.88% | 5.88% | 5.96% |
| Panel B : Overnight Rates | ||||||
| 1994-02-16 | 1994-02-17 | 1994-02-18 | 1994-02-22 | 1994-02-23 | ||
| 3.29% | 3.53% | 3.65% | 4.19% | 2.63% | ||
(a) Estimate the value of forward contracts for each of the next five days.
(b) Assume the presentation of an entity and counterparty to market forward contracts and describe the cash flows between the counterparty over time.
(c) Panel B includes night rates. Calculate the total gain or loss on the contract in two, three, four, and five days.
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