You are making markets in derivatives for a specific asset which is trading for $150 in the spot market at this time. Today is December 1, 2021 and the U.S. term structure of moneymarket interest rates is provided below. These rates are expressed in decimals.

Term End                  Rate

0x6     2022-06-01   0.0050

0x12   2022-11-30   0.0100

0x18   2023-05-27   0.0140

0x24   2023-12-01   0.0190

0x30   2024-05-31   0.0225

0x36   2024-11-30   0.0275

0x42   2025-05-31   0.0310

0x48   2025-11-30   0.0345

A) Determine the fair delivery price of a forward contract on this asset expiring November 30, 2025. Spell out each step associated with the manufacturing process of this instrument, in the proper sequence.

B) If you expect to receive $7.50 in income from this asset on May 31, 2025, what is the fair delivery price for this contract? Spell out each step associated with the manufacturing process of this contract, in the proper sequence.

C) If you expect to receive $7.50 in income from this asset on May 27, 2023, on May 31, 2024, and on May 31, 2025, what is the fair delivery price of this contract? Spell out each step associated with the manufacturing process of this contract, in the proper sequence.

D) Based on the three cases, how is the manufacturing cost of a forward contract impacted when the underlying asset pays income during the contract's life? Please, be

brief and to the point.

E) At what level should the periodic income in be for the contract's fair delivery price to be exactly equal to the spot price of the asset?

Answer rating: 100% (QA)

A To determine the fair delivery price of a forward contract expiring on November 30 2025 we need to follow these steps 1 Determine the time to expira... View the full answer