Suppose that forward contract is valued at Php5,100 instead of the no- arbitrage price. This bond must be delivered 5 months from now due to a short position in the forward contract. In this case, the arbitrage entails borrowing Php4,777 at the risk-free rate of 6.28%, purchasing the bond for Php4,777, and simultaneously taking a short position in the forward contract on the zero-coupon bond, obligated to deliver the bond for the forward price and receive Php5,100 at the contract's expiration. We can fulfill our forward contract obligations at the settlement date by delivering the zero-coupon bond for payment of Php5,100, regardless of its market value at the moment. The Php5,100 cash from the forward contract settlement would be used to repay the Php4,777 loan. What is the total amount of repaying the loan over 5 months?
Suppose that forward contract is valued at Php5,100 instead of the no-
arbitrage price. This bond must be delivered 5
months from now due to a short position in the forward contract. In this
case, the arbitrage entails borrowing Php4,777 at the risk-free rate of
6.28%, purchasing the bond for Php4,777, and simultaneously taking a
short position in the forward contract on the zero-coupon bond, obligated
to deliver the bond for the forward price and receive Php5,100 at the
contract's expiration. We can fulfill our forward contract obligations at the
settlement date by delivering the zero-coupon bond for payment of
Php5,100, regardless of its market value at the moment. The Php5,100
cash from the forward contract settlement would be used to repay the
Php4,777 loan. What is the total amount of repaying the loan over 5
months?
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