“The first objective is a need with a 5-year horizon and a 95% chance of success. The discount rate is 2.3%. When the FRA expires, you know the fixed interest rate and you know the variable interest rate so you know the payment. You could wait 6 months and then make the payment, but the convention is to discount that payment for today and do it today. Increase the allocation to Treasuries relative to companies if a spread expansion is expected. Think of it as a 1-period swap. You may have had a variable rate payment and you fear a rise in interest rates: you enter a FRA as a fixed income in order to reduce the risk. I don`t understand. Why and how are corporate bonds less volatile than more liquid treasuries? I always thought that Governemnet bonds would have the slightest volatility. You are a FRA for a long time if you get the variable interest rate. The party in a long position agrees to borrow $15 million in 90 days (transaction date). An interest rate of 2.5% will then be applied for the remaining 180 days of the contract. The design of traditional bonds – fixed coupon rate and repayment at maturity – is a problem when the flow of responsibility is an annuity at the payment level.
This scene would lead to large cash stocks between payment dates and, therefore, to a risk of cash reinvestment. But when the FRA expires and billing has taken place, what will happen to the underlying in the remaining 9 months after 3×9. Indeed, in accordance with the futures contract, settlement occurs only at the end of the delivery of assets or the exchange of liquidity, as the case may be, and that there are no assets left thereafter. What do corporate bonds mean in the context of surplus optimization? And why does the most conservative asset allocation almost give up cash? When opening the futures contract, no money is exchanged and the contract at the opening is worthless (V0 (T)). The futures price agreed by the parties at the opening is a special price that means that the contract has no value and therefore has no possibility of arbitration. The forward price at the beginning is the spot price of the compound underlying at the risk-free interest rate over the term of the contract. . . .
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