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CFA Level 2
Derivatives

Calculating Forward Price for Fixed Income

Easy Forward Pricing And Valuation Fixed Income Forwards

Consider a fixed income forward contract where the buyer agrees to purchase a specific bond from the seller at a future date, T, for a predetermined price, K. The bond currently has a market price of $1,000. The risk-free interest rate is 3% per annum, and the time until the contract's expiration is 2 years. If the market price of the bond at expiration, T, is expected to increase, what should the price K be set at in order to ensure the forward contract is fairly priced from the beginning?

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