Lecture7_0922 - MGMT 4380 MGMT 6370 Derivatives Markets...

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9/22/2016 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 Forwards & Futures Prices 2
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9/22/2016 Aparna Gupta, Lally School of Mgmt 2 3 What if the Investment Asset Provides a Known Dollar Income F 0 = ( S 0 I )e rT where I is the present value of the income during life of forward contract F 0 = S 0 e ( r q ) T where q is the average yield during the life of the contract (expressed with continuous compounding) Or Provides a Known Yield 4 Stock Index Can be viewed as an investment asset paying a dividend yield The futures price and spot price relationship is therefore F 0 = S 0 e ( r q ) T where q is the average dividend yield on the portfolio represented by the index during life of contract When F 0 > S 0 e (r-q)T an arbitrageur buys the stocks underlying the index and sells futures When F 0 < S 0 e (r-q)T an arbitrageur buys futures and shorts or sells the stocks underlying the index
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