Section 13 - ECON 136: Financial Economics Section 13 (Dec...

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ECON 136: Financial Economics Section 13 (Dec 4th) Xing Huang 1 Economics Department, UC Berkeley 1 Futures and Forward 1.1 Review Forward Contract: the arrangement for future delivery of asset at agreed upon price Futures: a standardized forward contract that trades on organized exchanges What±s on futures contract? delivery date or maturity date, T futures price F T t : price agreed at time t to be paid at time T position: long or short Forward pricing: No Arbitrage (LOOP) Simple fomula: F 0 = S 0 ± (1 + R f ) T General fomula: F 0 = S 0 ± (1+ storage cost + foregone interest - income from holding ) T More stu/s about futures for traders to liquidate positions easily. If you are currently long in a contract and want to undo your position, you simply instruct your broker to enter the short side of a contract to close out your position. who buys a contract at time 0 and closes at time t is F t ² F 0 ; Simmetrically, the short trader earns F 0 ² F t : These changes will be revealed in margin account. speculation and hedging. futures contract because low transaction costs of futures markets and the leverage futures trading provides. b. hedging: protect against price movement. For example, holding a T-bond portfolio and taking short positions in T-bond futures will lock in the sales price for the bonds. 1 Thank you all very much !! 1
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1.2 Examples 1. True or False a. All else equal, the futures price on a stock index with a high dividend yield should be higher than the futures price on an index with a low dividend yield. b. All else equal, the futures price on a high-beta stock should be higher than the futures price on a low-beta stock.
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This note was uploaded on 01/25/2010 for the course ECON 136 taught by Professor Szeidl during the Fall '08 term at University of California, Berkeley.

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Section 13 - ECON 136: Financial Economics Section 13 (Dec...

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