Welcome to the hotseat. We've prepared a guide if you'd like to read more about how it works.

is the spot price calculated at time 0 (i.e 6 months before the first coupon) or when the contract is negotiated?

0 votes
asked Nov 16, 2017 in BUS 2016H - Financial Mathematics by anonymous

image image

In Question 2, why did we calculate the present value of the security to time 0 not 8/12 months if the contract is negotiated at time 8/12?

1 Answer

0 votes
answered Nov 20, 2017 by Michael (580 points)
The memo solution is in fact incorrect.

The correct solution is as follows:
$$P = v^{\frac{2}{3}}(5\ddot{a}_{\overline{19}|}+120v^{18}) = 142.26$$
$$I = v^{\frac{2}{3}}(5+5v+5v^2) = 14.29$$
$$K=(P-I)e^{0.05\text{x}1.5} = 137.93$$
where the basic time unit is 6 months.

Hence the forward price per R90 000 nominal is R124 140.