7sl - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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1 THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND ECONOMICS FINA0301CDE - DERIVATIVES First Semester, 2009-2010 Tutorial 5* Slide Chapter 7 – Interest Rate Forwards and Futures (*We will cover remaining parts of Tutorial 4 with some additional slides) Arbitrage Example 1 Years to Maturity Zero-Coupon Bond Price One-Year Implied Forward Rate 1 0.943396 6.00000 2 0.881659 7.00237 3 0.816298 8.00705 Actual r 0 = 6.8% 1. Create a Synthetic lending opportunity at the Zero-coupon implied forward rate of 7.00237% 2. Finance it by borrowing at 6.8%
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FINA0301 – Tutorial 5 Slide Mr. Clive Man Chung HO 2 Arbitrage Example 2 Years to Maturity Zero-Coupon Bond Price One-Year Implied Forward Rate 1 0.943396 6.00000 2 0.881659 7.00237 3 0.816298 8.00705 Actual r 0 = 7.2% 1. Create a Synthetic borrowing opportunity at the Zero-coupon implied forward rate of 7.00237% 2. Lend it at 7.2%
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FINA0301 – Tutorial 5 Slide Mr. Clive Man Chung HO 3 Forward Rate Agreement FRAs are over-the-counter contracts that guarantee a borrowing or lending rate on a given notional principal amount Borrower: Long Forward Rate Agreement Lender: Short Forward Rate Agreement s Borrower who enters an FRA is paid if the
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7sl - THE UNIVERSITY OF HONG KONG FACULTY OF BUSINESS AND...

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