Fair Value of the Bond Forward Contract

The value is the difference between the two fixed-income forward contracts ending at the same time. Finding it is the first step in finding the value of the contract. But it also needs to be discounted. But what's the time period for that discount?

Global insurance giant Paris Home and Family entered into a fixed-income forward contract several months ago. Now it needs to value the position. How would it go about doing that?

PHF wants to find the value of a contract with the same ending time period. In this case, it would need to calculate the value of current fixed-income forward rate contract using the equation $$\displaystyle F_0 = Q_0 \times CF$$, where $$CF$$ is the conversion factor. $$\displaystyle Q_0 = \left[ \frac{1}{CF} \right] \left( FV[B_0 + AI_0] - AI_T - FVCI \right) $$ And the other definitions are the same as the bond forward contract pricing.

No. PHF doesn't need the initial value, so there's no reason to discount back to that point.

No. This period has already passed, so that's not relevant anymore.

Exactly! That is the time period the forward contract has remaining, which is _T_ - _t_. PHF wants to value the contract over that remaining time period by using the risk-free rate. The valuation equation is $$\displaystyle V_t = PV[F_t -F_0]$$.

To sum it up: [[summary]]

Yes!

No. A short or long contract that's opposite the original contract won't give the value of the current position.

The total time period of the contract

The difference between the ending date and valuation date

The difference between the starting date and the valuation date

Find the value of an offsetting contract

Find the value of a opposite contract starting from the valuation date

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