# Tag Info

3

As long as your market is complete and $\tau$ is measurable w.r.t. the filtration generated by the market the continuous cash flow paid until $\tau$ is a hedgeable contingent claim and you have to work under the risk neutral measure.

2

I think you have a little misunderstanding about treasury futures. I would get this book: http://www.amazon.com/Treasury-Bond-Basis-Depth-Arbitrageurs/dp/0071456104?ie=UTF8&psc=1&redirect=true&ref_=oh_aui_search_detailpage It is the absolute best guide to this product. A few important things to understand: Every treasury future has ...

2

Why don't you calculate the IRR of each investment? (aside from all the issues with IRR).

2

I have laid out below one way of solving this kind of problem. You have your timeline right and I have reproduced it with the correct amounts. The way to discount your 30Ks is the same as discounting 1,500K if you do it this way. Basically, you need to compute a discount factor. To calculate this discount factor, you need to de-annualize your interest rate ...

2

The conversion factor associated with each bond the futures' delivery basket is constructed such that the invoice prices of the bonds are identical under the assumption that the yield curve is flat at the level of the futures' notional coupon. Therefore, the bond with the highest duration will be the CTD when yields are above the notional coupon and the bond ...

2

First, I am not sure which exact statement was made. Also, you cannot just say "without CF" because you are essentially creating an artificial market with messed-up utility. In summary the cheapest-to-deliver bond is: The bond that results in the smallest loss or greatest profit for the futures seller. Futures sellers have to buy the bonds they are going ...

2

Pricing always takes place under the risk neutral probability measure. In fact, this would make the price more conservative (i.e. lower) with respect to risk; if you priced it under the true measure you would be putting a smaller hazard rate for this random time. Completeness make the risk neutral probability measure unique. In your case you might have ...

1

A simple query on google could have given you the answer... Let's define lumpsum q periodic contribution a y periods a periodic rate i $$q*(1+i)^y + a( ((1+i)^y-1) / i ) - a = f$$ Suppose we do not want an initial investment $q=0$. 2040 - 2016 = 24 years. As you want to know the monthly contribution, everything needs to be converted to months. Thus ...

1

The annuity expression $a_{4}^{(12)}$is written as: $$a_{4}^{(12)}= \frac{1-(1+i)^{-4}}{i^{(12)}} = \frac{i}{i^{(12)}} a_4$$ where, $i$ is the effective annual rate of interest and $i^{(12)}$ is nominal rate of interest convertible monthly, which is equal to $$i^{(12)}=12((1+i)^{1/12}-1)$$ There is no closed formula to get the interest rate, you have to ...

1

The annuity method is the correct method. I am not familiar with wolframalpha but I assume it is correct. Look at it this way: in the second case (take out 481,000, repay 500,000 after 100 days) you have full use of the borrowed 481,000 for 100 days. In the first case (takeout 481,000, repay with an annuity of 10 payments over 100 day) you effectively ...

1

In a case like this, where the settlement date is in the middle of the coupon period, it is not right to use PV = -110 (minus the purchase price) in Step 3. Instead you should increase the purchase price by the accrued interest, which is a fraction of the coupon based on how far the settlement date is within the current coupon period. (So for ex if you are ...

1

The direct answer to your question on the choice of m is, "It depends." Your choice of m is dependent on the convention used by the source of your discount rate. Either may be appropriate. If you are actually looking to estimate a "fair" value, then the following will be relevant: A market yield(-to-maturity) approach assumes coupon reinvestment at that ...

1

In a world of uncertainty no one knows what future profits will be (especially > 1 year from now). All we can do is estimate. Who should we ask? The company management has an incentive to give out estimates that may be too optimistic. If you ask the competitors they are probably too pessimistic. Fortunately we have a machine called the stock market which ...

Only top voted, non community-wiki answers of a minimum length are eligible