Lecture3_0908 - MGMT 4380 MGMT 6370 Derivatives Markets...

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9/8/2016 Aparna Gupta, Lally School of Mgmt 1 MGMT 4380 / MGMT 6370 Derivatives Markets Aparna Gupta Lally School of Management Office: PITTS 1116 Email: [email protected] Phone: x2757 1 Aparna Gupta, Lally School, RPI Forward Contract, Forward Price The forward price for a contract is the delivery price that would be applicable to the contract if were negotiated today (i.e., it is the delivery price that would make the contract worth exactly zero) The forward price may be different for contracts of different maturities Aparna Gupta, Lally School, RPI 2
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9/8/2016 Aparna Gupta, Lally School of Mgmt 2 Futures Contracts Agreement to buy or sell an asset for a certain price at a certain time Similar to forward contract Whereas a forward contract is traded OTC, a futures contract is traded on an exchange Maintain a margin account, that is updated periodically Aparna Gupta, Lally School, RPI 3 Example of Forward Contract On July 20, 2016 the treasurer of a corporation enters into a long forward contract to buy £1 million in six months at an exchange rate of 2.0489 This obligates the corporation to pay $2,048,900 for £1 million on January 20, 2017 What are the possible outcomes? Aparna Gupta, Lally School, RPI 4
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9/8/2016 Aparna Gupta, Lally School of Mgmt 3 Profit from a Long Forward Position Aparna Gupta, Lally School, RPI 5 Profit Price of Underlying at Maturity, S T K Profit from a Short Forward Position Aparna Gupta, Lally School, RPI 6 Profit Price of Underlying at Maturity, S T K
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9/8/2016 Aparna Gupta, Lally School of Mgmt 4 1. Gold: An Arbitrage Opportunity? Suppose that: The spot price of gold is US$900 The 1 year forward price of gold is US$1,020 The 1 year US$ interest rate is 5% per annum Is there an arbitrage opportunity? Aparna Gupta, Lally School, RPI 7 2. Gold: Another Arbitrage Opportunity? Suppose that: The spot price of gold is US$900 The 1 year forward price of gold is US$900 The 1 year US$ interest rate is 5% per annum Is there an arbitrage opportunity?
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