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Does the results of using options/ futures/ forward/ money market hedge /swap discounted to take account of the present value. Or this can be seen as a disadvantage when commenting on your results on which method to choose in a given question.
In p4 these derivatives for most part are for like 3 to 6 months period max, so I think in our syllabus they ignore the time value of money because it’s not gonna be much significant change in time value of money in say 3 months.
Anyways that’s what I think, let’s wait for the tutor’s reply.sukhdeo: We do not discount the results and therefore they do not take account of the time value of money.
However, for futures/ forward rates/ money market hedge it is not relevant because the net cash flow only occurs on the date of the transaction (where it be in one month or three months of whatever). Whatever is the best in (say) three months time would still be the best if we discounted. So we don’t discount!)
But, the one method where strictly it does make a difference is with options. This is because the premium is payable now, but the result of exercising/not exercising occurs later. Usually we simply look at the net effect (i.e. what happens on the date we exercise combined with the premium payable) and then compare with other possibilities.
If you want a bonus 1 or 2 marks, then when calculating the result from using options then what we should really do is not discount, but add interest for the period (say 3 months) to the option premium before calculating the net result in (say) 3 months time and comparing with the other possibilities.
I would only do this if you have time. Otherwise don’t bother (but you could still just write a line mentioning this – it would probably get you a mark for proving that you were aware of it).
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