Lessons
- CFA Level 2: Derivatives Part 1 – Introduction
- What are Forward Contracts?
- Equity Forward Contracts
- Fixed Income Forward Contracts
- Currency Forward Contracts
- Forward Rate Agreements (FRA)
- Credit Risk and Forward Contracts
- Introduction to Futures Contracts
- Futures: Convergence of Spot and Futures Prices at Expiration
- Futures Prices vs. Forward Prices
- Contago and Backwardation
- Pricing Stock Index Futures
- Pricing Interest Rate/Treasury Bond Futures
- Pricing Currency Futures
- Eurodollar Futures
Fixed Income Forward Contracts
A fixed income forward contract is an agreement between two parties to buy a pre-specified number of a fixed income security at a given price at a given date.
The formulas for pricing and valuing fixed income forward contracts are similar to that of equity forward contracts, simply replace stock price with bond price (including accrued interest) and dividend payment with interest coupon payment.
Price at initiation: F(0,T) = (S0 - PV(coupon pmts over contract life))(1+r)T
Value at time "t": Vt(0,T) = St - PV(coupon pmts remaining in contract life) - PV[F(0,T)]