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Payoff Diagrams for Forward Contracts and European Options on Zero-Coupon Bonds

This document presents detailed payoff diagrams for various financial instruments involving zero-coupon bonds. It covers a forward contract with a delivery date T1 and T2-maturity, demonstrating its payoff structure. Additionally, it illustrates the payoff diagrams for European call and put options on T2-maturity zero-coupon bonds, each with a specified strike price K and expiration date T1. These figures aid in understanding the risk and return profiles associated with these financial derivatives.

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Payoff Diagrams for Forward Contracts and European Options on Zero-Coupon Bonds

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  1. P(T1, T2) - F(t, T1: T2) Figure 3.1: Payoff Diagram for a Forward Contract with Delivery Date T1 on a T2-maturity Zero-coupon Bond P(T1, T2) 0 F(t, T1: T2)

  2. C(T1, T1, K: T2) = max [P(T1, T2) - K, 0] Figure 3.2: Payoff Diagram for a European Call Option on the T2-maturity Zero-coupon Bond with Strike K and Expiration Date T1 P(T1, T2) K

  3. P(T1, T2, K: T2) = max [K - P(T1, T2), 0] K P(T1, T2) K Figure 3.3: Payoff Diagram for a European Put Option on the T2-maturity Zero-coupon Bond with Strike K and Expiration Date T1

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