The Repo rate The risk-free rate available to investors is the repo rate repurchase agreement You sell securities to another investor Buy them back at a higher price The difference between the two prices is the interest earned by the counterparty Charles cao
6 Charles Cao The Repo Rate ◼ The risk-free rate available to investors is the repo rate, repurchase agreement ◼ You sell securities to another investor ◼ Buy them back at a higher price ◼ The difference between the two prices is the interest earned by the counterparty
The Repo rate Repo is slightly higher than the t-bi rate Overnight repo term repo Charles cao
7 Charles Cao The Repo Rate ◼ Repo is slightly higher than the T-bill rate ◼ Overnight repo, term repo
Forward contracts Notations. expiration day current time T-t: the life of the contract(in years) price of asset underlying forward contract at t Charles cao
8 Charles Cao Forward Contracts ◼ Notations: T : expiration day t : current time T-t : the life of the contract (in years) St : price of asset underlying forward contract at t T
Forward contracts Notations:(cont St: price of asset underlying forward contract at T F: forward price at t r: risk-free rate per year k: delivery price in forward contract f: value of a long forward contract Charles cao
9 Charles Cao Forward Contracts ◼ Notations: (cont.) ST : price of asset underlying forward contract at T F : forward price at t r : risk-free rate per year K: delivery price in forward contract f : value of a long forward contract
Forward contracts a Forward contracts on a security that provides no income Determine today's forward price using no arbitrage argument Charles cao
10 Charles Cao Forward Contracts ◼ Forward contracts on a security that provides no income ◼ Determine today’s forward price using noarbitrage argument