You hold a forward contract to take delivery of Treasury bonds in 9 months.If the entire term structure of interest rates shifts down over the 9-month period,the value of the forward contract will have _____ on the date of delivery.

Question

Quizplus · Accepted Answer

A downward shift in the entire term structure of interest rates usually leads to an increase in the price of bonds, including Treasury bonds. Since the forward contract locks in the price of the Treasury bond at the time of purchase, a lower interest rate environment at the time of delivery will result in the value of the forward contract rising.

You Hold a Forward Contract to Take Delivery of Treasury