CHAPTER 5

5.11. Six month spot rate

94.0 = 100 e-Rx0.5
-Rx0.5=ln(94/100)
R = ln(100/94)/0.5 = 12.37%
1 year spot rate
89 = 100e-Rx1
-Rx1 = ln(89/100)
R = ln(100/89) = 11.65%
1.5 year spot rate
94.84 = 4e-0.1237x0.5 + 4e-0.1165x1.0 + 104e-Rx1.5
-Rx1.5 = ln[(94.84 -4e-0.1237x0.5 - 4e-0.1165x1.0)/104] = ln(87.5198/104)
R x 1.5 = ln(104/87.5198)
R = ln(104/87.5198)/1.5 = 11.50%
2 year spot rate
97.12 = 5e-0.1237x0.5 + 5e-0.1165x1.0 + 5e-0.1150x1.5 + 105e-Rx2
-Rx2 = ln[(97.12 -5e-0.1237x0.5 - 5e-0.1165x1.0 - 5e-0.1150x1.5)/105] =
ln(83.7619/105)
R x 2 = ln(105/83.7619)
R = ln(105/83.7619)/2 = 11.30%

5.17.
Bond

Price

125-05

142-15

Conversion factor Bonds quoted price - Quoted

futures price x Conversion factor
1.2131
125 5/32 - 101 12/32 x 1.2131 =
2.18
1.3792
2.65

115-31

1.1149

2.94

144-02

1.4026

1.87 - Cheapest to deliver bond

is this one

Formula used:
$L ( FRA rate - LIBOR rate )( T2 T1 ) e R T

2 2

5.21.

|----------7.5%------------|-----------Forward rate?-----------|
0
6 month
9 month
|------------------------------8%----------------------------------|

Forward rate = [8 x 9/12 -7.5 x 6/12]/[9/12 - 6/12] = 9%

The above rate is the rate with continuous compounding. With quarterly
compounding, this becomes:
4[e0.09x0.25-1] = 0.09102
Since money market instruments use the day count convention, actual/360,
this rate becomes:
0.09102 x 360/365 = 0.08977

The futures price = 100-0.08977x100 = 91.0230 (Ans)

P DP
Formula used:
FC DF
Here, 91-12 for cheapest-to-deliver bond 91
12/32

91.375
Total Value= 91.375 * 1000 (FV=1000)
= 91,375