AFM481 Study Guide - Current Yield, Accrued Interest, Conversion Of Units

• School: University of Waterloo
• Department: Accounting & Financial Management
• Course: AFM481
• Professor: Christine Dupont

Document Summary

Allow easier methods to short sell a stock without a broker lending it. Allows the ability to take long/short position on less available commodities (rice, cotton, etc. ) Hedger attempts to reduce exposure to operating risk within firm. Speculator profiting from a bet that markets will move in a certain direction. Forward a binding agreement (obligation) to buy/sell an asset or a commodity in the future, at a price set today. Contract specifies: features and quantity of the asset to be delivered. Forward price with no storage cost: f0 = s0(1 + r )t. Assumptions: no transaction cost, same rate for borrowing/lending, no default/counterparty risk. Spot price is , risk free rate = 4%, f0 = . Theoretical forward price = 450 e (4% * 1) = 468. 34 => there is an arbitrate opportunity. Buy gold spot and sell it at time t. Bond is 1,074 and forward price is 1,060. Rates are 8% (6mo. ) and 9% (1yr) with continuous compounding.