bond forward

[sofianeB]

I red in the schweser that a long will have losses on a contract when interest rate rises. I thought it was the contrary and that because interest rate rise have a negative effect on bond prices, the long would be able to purchase the bond at a lower price than the one stated at the forward rate?

Can I have an explanation?

 

[bean]

The 'long' is in the contract to purchase at the current price which is higher that than price at settlement if rates have gone up (price has gone down).

 

[pierovic18]

Your assumption is wrong because the price was already determined. You are expecting to buy something for 50 and if interest goes up, price will go down, therefore you loose money



Edited 1 time(s). Last edit at Wednesday, April 19, 2006 at 01:41PM by pierovic18.

 

[sofianeB]

Yes but if I follow what you said, I'll be able to buy the bond at a price lower than the one that was already determined in the contract. So if rates goes up, price goes down and the long wins money... I can't understand why it's the contrary in the schwesers?

 

[jamespucyk]

A long position stands to gain if BOND PRICES increase or if INTEREST rates DECREASE, based upon the inverse relation of yields and bond prices. There are derivatives based purely on interest rates, but a bond future or forward is based upon a bond price and therefore you have to take the short position to hedge against an interest rise and a long against a decrease.