Assume that a 6-month forward contract on a zero-coupon bond with market face value of Php12,000 and is currently priced at Php8,000. With an annual risk-free interest rate of 5.0625%, the forward contract price under the no-arbitrage principle is a. Php8,000. b. Php7,794.87. c. Php7,500. d. Php8,200. Let's pretend the forward contract is truly worth Php8,300 instead of the no-arbitrage price determined above. This bond must be delivered 6 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php8,000 at the risk-free rate of 5.0625%, purchasing the bond for Php8,000, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php8,300 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php8,300, regardless of its market value at the moment. The Php8,300 cash from the forward contract settlement would be used to repay the Php8,000 loan. What is the total amount of repaying the loan over 6 months? a. Php8,000 b. Php7,794.87 c. Php8,200 d. Php7,500
Assume that a 6-month forward contract on a zero-coupon bond with market face value of Php12,000 and is currently priced at Php8,000. With an annual risk-free interest rate of 5.0625%, the forward contract price under the no-arbitrage principle is a. Php8,000. b. Php7,794.87. c. Php7,500. d. Php8,200. Let's pretend the forward contract is truly worth Php8,300 instead of the no-arbitrage price determined above. This bond must be delivered 6 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php8,000 at the risk-free rate of 5.0625%, purchasing the bond for Php8,000, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php8,300 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php8,300, regardless of its market value at the moment. The Php8,300 cash from the forward contract settlement would be used to repay the Php8,000 loan. What is the total amount of repaying the loan over 6 months? a. Php8,000 b. Php7,794.87 c. Php8,200 d. Php7,500
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 9P
Related questions
Question
Assume that a 6-month forward contract on a zero-coupon bond with market face value of Php12,000 and is currently priced at Php8,000. With an annual risk-free interest rate of 5.0625%, the forward contract price under the no-arbitrage principle is
a. Php8,000.
b. Php7,794.87.
c. Php7,500.
d. Php8,200.
Let's pretend the forward contract is truly worth Php8,300 instead of the no-arbitrage price determined above. This bond must be delivered 6 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php8,000 at the risk-free rate of 5.0625%, purchasing the bond for Php8,000, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php8,300 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php8,300, regardless of its market value at the moment. The Php8,300 cash from the forward contract settlement would be used to repay the Php8,000 loan. What is the total amount of repaying the loan over 6 months?
a. Php8,000
b. Php7,794.87
c. Php8,200
d. Php7,500
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