This document contains lecture slides on futures, forwards, swaps, and related concepts. It includes examples of calculating forward and futures prices using the cost of carry model, and examples of hedging with futures contracts. It also provides practice problems for valuing interest rate swaps and calculating swap rates and cash flows given term structure data. The document is intended to teach students about derivative pricing and the use of different derivative contracts.

1. © 2018 Dr. N. Richie, UNCW 1
Futures, Forwards, and Swaps

2. © 2018 Dr. N. Richie, UNCW 2
Futures and Forwards
Cost of Carry Model

3. © 2018 Dr. N. Richie, UNCW 3
You are considering the purchase of an
asset four months from now. The asset is
currently trading in the spot market for
$250. The risk-free rate is 4%.
(A) Calculate the arbitrage-free forward price on this asset.
(B) If a dealer offers you a forward contract at a price lower than you
calculated in (A), what transactions would earn you an arbitrage
profit?
(B) If a dealer offers you a forward price higher than you calculated
in (A), what transactions would earn you an arbitrage profit?
(C) After one month, the asset is trading for $240 in the spot market.
What is the value of the forward contract in (A)? Is this a gain or
a loss?

4. © 2018 Dr. N. Richie, UNCW 4
Consider an asset currently worth $75.
An investor is concerned that the asset
may decline in value over the next 6
months and enters a futures contract to
hedge the risk. The risk-free rate is 6%.
(A) Should the investor go long or short to hedge the risk?
(B) What is the arbitrage-free futures price of the contract?
(C) If the asset is trading for $80 in the spot market 2
months later, what is the value of the futures contract
at that time? Is this a gain or loss to the investor?

5. © 2018 Dr. N. Richie, UNCW 5
Futures and Forwards
Currency Forwards

6. Source: Chance, D., 2003, Analysis of Derivatives for the CFA Program, AIMR, p. 70-78.
© 2018 Dr. N. Richie, UNCW 6

7. Source: Chance, D., 2003, Analysis of Derivatives for the CFA Program, AIMR, p. 70-78.
© 2018 Dr. N. Richie, UNCW 7

8. © 2018 Dr. N. Richie, UNCW 8
Interest Rate Swaps

9. © 2018 Dr. N. Richie, UNCW 9
Problem 1: Consider a 1-year interest rate swap
to pay fixed and receive floating with quarterly
payments and a $15 million notional principal.
Calculate the swap fixed rate and the first net
payment, given the current term structure of
LIBOR
ti L0(ti)
90 4.50%
180 5.00%
270 5.25%
360 5.80%

10. © 2018 Dr. N. Richie, UNCW 10
Problem 1: Calculate the value of the swap
in 30 days later (A) from the point of view
of the fixed rate payer and (B) from the
point of view of the floating rate payer. The
new term structure is:
ti L30(ti)
60 4.75%
150 4.65%
240 4.25%
330 3.90%

11. © 2018 Dr. N. Richie, UNCW 11
Problem 2: Consider a 2-year interest rate swap
to pay fixed and receive floating with semi-
annual payments and a $40 million notional
principal. Calculate the swap fixed rate and the
first net payment, given the current term
structure of LIBOR
ti L0(ti)
180 6.25%
360 5.80%
540 5.40%
720 5.15%

12. © 2018 Dr. N. Richie, UNCW 12
Problem 2: Calculate the value of the swap
120 days later. The new term structure is:
ti L120(ti)
60 4.50%
240 4.80%
420 5.75%
600 6.15%