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Subject 2. The Concept of Pricing vs. Valuation
#cfa #cfa-level-1 #derivatives #los-59-a #reading-59-basics-of-derivative-pricing-and-valuation
The value of a forward, futures and swap contract is zero at initiation date. Its price is the fixed contract price. Both price and value are relevant in determining the profit for both parties.

Example

Two parties agree to a forward contract to deliver a zero-coupon bond at a price of $97 per $100 par in 3 month.

At initiation date:

  • Value: 0
  • Price: $97

At the contract's expiration, suppose the underlying zero-coupon bond is selling at a price of $97.25. The long is due to receive from the short an asset worth $97.25, for which a payment to the short of $97 is required.

  • Value: $0.25
  • Price: $97
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