At the very beginning of the session we had a look at Markets and we determined that EURUSD was moving a lot due to the recent activity in short-term interest rates in EUR and USD. This relationship is called the interest rate parity. I have prepared a chart with the following data: x = difference in implied yield for 2 year bond futures (US and EUR); y = EURUSD.
As you can see from R^2, the relationship is quite strong. The chart includes data from Jan-2011 until today.
According to the model, EURUSD should be trading at around 1.2961 given the current level of interest rates in EUR and US.
During this session we reviewed some basics on options. Remember, options provide a right to those who buy them and an obligation to those who sell them. They can be traded both in Exchanges and in OTC Markets.
We saw in class that options can be vanilla or exotic and we also saw that the premium of an option can be decomposed into Intrinsic Value (=payoff of the option) and Time Value (depends on volatility and other parameters).
We also had a look at put-call parity, a way to value option applying no-arbitrage assumptions.
The presentation can be found here.
During this session we reviewed how to price forwards on currencies. Please, have a look at the Excel file. The idea is exactly the same as with other asset classes: if the forward is too expensive (if the forward price should be 1.3062 and it is trading at 1.28 - I can buy less USD for the same amount of EUR), I will sell USD forward; if the forward is too cheap (if the forward price should be 1.3062 and it is trading at 1.32 - I can buy more USD for the same amount of EUR), I will buy USD forward. There is only one no-arbitrage possibility: F = S * e ^ (rd - rf).
Additionally, we had a look at how we should price forwards on consumption assets. In this case, we must take into account any potential convenience yield (for instance, to avoid shortages of the product that could affect our production line) and, also, any storage cost.
Remember the logic behind of the formula:
F = S * e ^ (+ any potential cost - any potential income)
The first day we buy/sell a Forward, the MTM of the position (value) is equal to zero. Remember we do not have to pay anything when we buy/sell a Forward. However, as time goes by and as the underlying asset and interest rates move, the MTM of the Forward will change. Basically, we will compare the price at which we can buy/sell at Maturity with the current Forward price and we will bring the difference to present value.
Finally, in spite of the fact that we will assume both Futures prices and Forward prices to be the same during the course, we reviewed why they are not (correlation between interest rates and price of the underlying asset, different interest rates, credit risk). You can find the presentation here.
En las últimas dos clases hemos estado revisando como se valoran forwards y futuros.
La base que utilizamos en la valoración es la asunción de "no-arbitraje". Esta asunción nos permite determinar el precio de los forwards/futuros asegurando que, si está caro, el Mercado arrastrará el precio abajo, mientras que, si está barato, el mercado llevara el precio hacia arriba.
Como hemos visto durante estos días, cuando hay costes (el coste de oportunidad que representa el tipo de interés, el coste de almacenamiento en los commodities...), el precio Spot se capitaliza a esos costes; cuando hay rendimientos (dividendos, cupones de bonos, rendimientos de conveniencia, el tipo de interés en otra moneda...), el precio Spot se descuenta a esos rendimientos.
He incorporado una hoja Excel en la que podéis ver cómo valorar un forward de divisa asumiendo que no hay arbitraje posible.
La última presentación que hemos revisado en clase podéis encontrarla aquí.
