Forward-Pricing

Forward-Pricing - Forward/Futures Pricing by Dr. Fernando...

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Forward/Futures Pricing by Dr. Fernando Diz
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Arbitrage Definition: Any trading strategy requiring no out  of pocket cash that has some  probability of making a profit, without  any risk of loss. An arbitrage opportunity  is such a  trading strategy.
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Arbitrage Suppose you want to purchase an  asset with borrowed money and profit  from writing a forward contract on the  asset.
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Arbitrage Suppose that it is cost-less to store gold,  the borrowing rate is 5% and you see the  following cash price for gold: S = 420.0 /oz Suppose you can find a buyer of a forward  contract that agrees to take delivery of  100oz of gold in a year at: f= 445.0 /oz  
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Arbitrage What do you do  to make money?  1. Buy 100 oz of gold @ $420.0 = $42,000 2. Finance the purchase by borrowing      $42,000 @ 5%/year 3. Write (Sell) 1 forward contract with a  forward price, f= $445.0 What are the out of pocket cash flows?
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This note was uploaded on 02/09/2010 for the course FIN 459 taught by Professor Yildary during the Spring '07 term at Syracuse.

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Forward-Pricing - Forward/Futures Pricing by Dr. Fernando...

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