Lecture4_FuturesRet - NBA 6730: Derivative Securities...

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1 NBA 6730: Derivative Securities Lecture 4: Asset Returns in Futures Market 09/07/2010 George Gao NBA6730-Derivative Securities I 2 Agenda This lecture discusses the relations between futures price and expected future spot price. We then look at the returns on futures market, study the portfolio strategy, and provide various interpretations. Risk premium in futures market (Gorton and Rouwenhorst, 2006; Rouwenhorst, 2009) Return predictability in futures market (Hong and Yogo, 2010) Portfolio strategy (Moskowitz et al., 2010)
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2 NBA6730-Derivative Securities I 3 (1) Different Types of Prices The current spot price ܵ is observed on the spot market Change over time, and set by demand vs. supply The future spot price ܵ is unknown and uncertain Expected price movement and unexpected price movement The expected future spot price ܧሺܵ Conditional on all the information available at time ݐ Futures price ܨ is set relative to ܵ by no arbitrage pricing A futures contract is a bet on the future spot price Risk premium = ܧ ܵ െܨ Source of return in futures market: unexpected price movement NBA6730-Derivative Securities I 4 (2) Futures Price vs. Expected Future Spot Price Backwardation: spot price > futures price
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3 NBA6730-Derivative Securities I 5 (2) Futures Price vs. Expected Future Spot Price Contango: spot price < futures price NBA6730-Derivative Securities I 6 (3) Returns from an Investment in Futures Futures markets are forward looking If the spot price is expected to be higher at maturity than it is
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This note was uploaded on 10/26/2010 for the course JOHNSON 6730 taught by Professor Georgegao during the Fall '10 term at Cornell University (Engineering School).

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Lecture4_FuturesRet - NBA 6730: Derivative Securities...

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