-2
$\begingroup$

enter image description here

This is Tuckman fixed income security textbook. The text here is trying to price a 990 six month call on a six month zero bond. When we replicate the portfolio, where is the F_.5 coming from?

My understanding is that the underlying is the F_1. Why we are adding F_.5 in the equation but not anything else?

Improve this question
$\endgroup$

1 Answer 1

Reset to default
2
$\begingroup$

The underlying is indeed the F_1. But the F_0.5 is required to determine the forward yield. Ie at what yield the F_1 is expected to trade at after 6 months.

Improve this answer
$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service and acknowledge you have read our privacy policy.

Not the answer you're looking for? Browse other questions tagged or ask your own question.