Roxy plans to buy four-month Treasury Bills in eight months.Currently the price on twelve-month Treasury Bills is $962,456 per million.The risk-free rate is 5.2%.What is the fair forward price per $1 million?

Question

Quizplus · Accepted Answer

The fair forward price can be calculated using the formula for the future value of the current price of the Treasury Bills, considering the risk-free rate for the period until the purchase (in this case, 8 months out of 12, or 2/3 of a year). The calculation is as follows: Forward Price = Current Price * e^(risk-free rate * time until purchase). Given the current price of $962,456 and a risk-free rate of 5.2%, the calculation for 8 months (or 2/3 of a year) would be $962,456 * e^(0.052 * 2/3), which approximates to $995,538.

Roxy Plans to Buy Four-Month Treasury Bills in Eight Months