Today is January 1.The forward price for contracts maturing on April 1 is $103 and on October 1 is $108.On April 1,the price of a zero-coupon bond maturing on October 1 is $0.97.Assuming that the underlying interest rate is a continuously compounded interest rate,the amount of profit that you can make on October 1 by trading one contract each of the near and distant maturity forwards and other securities is:

Question

Quizplus · Accepted Answer

To calculate the profit on October 1, we need to consider the cash flows at both maturities (April 1 and October 1) and the initial cost of entering into the contracts.

On April 1, we buy a zero-coupon bond with a face value of $1, which matures on October 1, for $0.97. The implied yield on the bond is:

$0.97 = $1 / e^(yield * 0.25)

yield = ln($1 / $0.97) / 0.25 = 1.24%

We can use this yield to discount the cash flows at October 1.

On October 1, we have to deliver the bonds to the counterparty and receive the forward price. We receive $108 for the distant maturity forward and pay $103 for the near maturity forward.

The profit is:

$108 * e^(-0.0124*0.75) - $103 * e^(-0.0124*0.25) - $0.97 = $1.81

Therefore, the correct answer is (C).

Today Is January 1