Interest Rate Futures versus Forward Contracts
Futures markets on short-term interest rates offer market participants a highly liquid, standardized alternative to FRAs. Interest rate futures contracts are available for monthly or quarterly market reference rates for successive periods out to final contract maturities of up to ten years in the future. Although the underlying variable is the market reference rate (MRR)…
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Pricing and Valuation of Interest Rate Forward Contracts
Interest Rate Forward Contracts Spot Rates and Discount Factors Forward Rates
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Pricing and Valuation of Forward Contracts
Pricing versus Valuation of Forward Contracts Pricing and Valuation of Forward Contracts at Initiation Pricing and Valuation of Forward Contracts with Additional Costs or Benefits
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Costs and Benefits Associated with Owning the Underlying
In the forward commitment example from the prior lesson, where no costs or benefits were associated with the underlying asset, the following relationship between the spot and forward prices was established: F0(T) = S0(1 + r)T. This relationship is shown under continuous compounding F0(T) = S0erT. The risk-free rate, r, denotes the opportunity cost of holding (“carrying”) the asset, whether or…
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