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  • 002 Spreadsheet Solution (Theta of A Forward Contract)

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    Swapnil Singh
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    This document discusses the theta of a forward contract. It shows how the value (DV) of the contract changes as the dividend yield (q) changes from 0% to 10%. Specifically: (1) When q=5.5%, the influences of lambda and theta cancel each other out, resulting in no change in the value of the contract (DV=0). (2) When q is equal to the risk-free interest rate, theta equals zero, meaning the effects of discounting and dividend payments offset each other so time does not impact the contract's value. (3) As q increases or decreases away from the risk-free rate, theta becomes positive or negative, causing the

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    002 Spreadsheet Solution [Theta of a forward contract]

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    This document discusses the theta of a forward contract. It shows how the value (DV) of the contract changes as the dividend yield (q) changes from 0% to 10%. Specifically: (1) When q=5.5%, the influences of lambda and theta cancel each other out, resulting in no change in the value of the contract (DV=0). (2) When q is equal to the risk-free interest rate, theta equals zero, meaning the effects of discounting and dividend payments offset each other so time does not impact the contract's value. (3) As q increases or decreases away from the risk-free rate, theta becomes positive or negative, causing the

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    8 views6 pages

    002 Spreadsheet Solution (Theta of A Forward Contract)

    Uploaded by

    Swapnil Singh
    This document discusses the theta of a forward contract. It shows how the value (DV) of the contract changes as the dividend yield (q) changes from 0% to 10%. Specifically: (1) When q=5.5%, the influences of lambda and theta cancel each other out, resulting in no change in the value of the contract (DV=0). (2) When q is equal to the risk-free interest rate, theta equals zero, meaning the effects of discounting and dividend payments offset each other so time does not impact the contract's value. (3) As q increases or decreases away from the risk-free rate, theta becomes positive or negative, causing the

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 6

    Theta of a forward contract

    T 1
    S0 75
    r 3%
    dq 0.25%
    dt 0.1

    q K lambda theta DV
    0.00% 77.28409 -75 -2.25 -0.4125 DV
    0.25% 77.09112 -74.812734 -2.0573502 -0.392767 0.4
    0.50% 76.89863 -74.625936 -1.8656484 -0.37313 0.3
    0.75% 76.70663 -74.439604 -1.6748911 -0.353588
    0.2
    1.00% 76.5151 -74.253738 -1.4850748 -0.334142
    0.1
    1.25% 76.32405 -74.068335 -1.2961959 -0.31479
    1.50% 76.13348 -73.883395 -1.1082509 -0.295534 0
    1.75% 75.94338 -73.698918 -0.9212365 -0.276371 0% 1% 1% 2% 2% 3% 3% 3% 4% 5% 5% 6% 6% 7% 7% 8%
    -0.1
    2.00% 75.75376 -73.5149 -0.735149 -0.257302 -0.2
    2.25% 75.56461 -73.331343 -0.5499851 -0.238327
    -0.3
    2.50% 75.37594 -73.148243 -0.3657412 -0.219445
    2.75% 75.18773 -72.965601 -0.182414 -0.200655 -0.4

    3.00% 75 -72.783415 0 -0.181959 -0.5


    3.25% 74.81273 -72.601684 0.18150421 -0.163354
    3.50% 74.62594 -72.420406 0.36210203 -0.144841
    3.75% 74.4396 -72.239581 0.54179686 -0.126419
    4.00% 74.25374 -72.059208 0.72059208 -0.108089
    4.25% 74.06834 -71.879285 0.89849106 -0.089849
    4.50% 73.8834 -71.699811 1.07549717 -0.0717
    4.75% 73.69892 -71.520785 1.25161375 -0.053641
    5.00% 73.5149 -71.342207 1.42684414 -0.035671
    5.25% 73.33134 -71.164074 1.60119167 -0.017791
    5.50% 73.14824 -70.986386 1.77465965 0
    5.75% 72.9656 -70.809142 1.9472514 0.017702
    6.00% 72.78342 -70.63234 2.1189702 0.035316
    6.25% 72.60168 -70.45598 2.28981934 0.052842
    6.50% 72.42041 -70.28006 2.45980209 0.07028
    6.75% 72.23958 -70.104579 2.62892171 0.087631
    7.00% 72.05921 -69.929536 2.79718146 0.104894
    7.25% 71.87928 -69.754931 2.96458457 0.122071
    7.50% 71.69981 -69.580761 3.13113427 0.139162
    7.75% 71.52079 -69.407027 3.29683377 0.156166
    8.00% 71.34221 -69.233726 3.4616863 0.173084
    8.25% 71.16407 -69.060858 3.62569504 0.189917
    8.50% 70.98639 -68.888421 3.78886317 0.206665
    8.75% 70.80914 -68.716415 3.95119388 0.223328
    9.00% 70.63234 -68.544839 4.11269033 0.239907
    9.25% 70.45598 -68.373691 4.27335568 0.256401
    9.50% 70.28006 -68.20297 4.43319306 0.272812
    9.75% 70.10458 -68.032676 4.5922056 0.289139
    10.00% 69.92954 -67.862806 4.75039644 0.305383
    DV

    3% 3% 4% 5% 5% 6% 6% 7% 7% 8% 8% 9% 9% 10% 10%
    q
    Theta of a forward contract
    (v) When q=5.5%, the influences of lambda and theta cancel to give dV=0, ie the value of the contract is unchanged

    (vi) When q is equal to the risk-free rate, theta equals zero.


    This means that the discounting by the risk-free rate is offset by the dividends being paid.
    The net effect is that the passage of time doesn't contribute to the change in the contract's value.
    f the contract is unchanged.

    tract's value.

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