Chapter05 - 1 Determination of Forward and Futures Prices...

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Unformatted text preview: 1 Determination of Forward and Futures Prices Chapter 5 2 Consumption vs Investment Assets Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold, silver) Consumption assets are assets held primarily for consumption (Examples: copper, oil) 3 Short Selling (Page 97-99) Short selling involves selling securities you do not own Your broker borrows the securities from another client and sells them in the market in the usual way 4 Short Selling (continued) At some stage you must buy the securities back so they can be replaced in the account of the client You must pay dividends and other benefits the owner of the securities receives 5 Notation S : Spot price today F : Futures or forward price today T : Time until delivery date r : Risk-free interest rate for maturity T 6 1. Gold: An Arbitrage Opportunity? Suppose that: The spot price of gold is US$390 The quoted 1-year forward price of gold is US$425 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity? 7 2. Gold: Another Arbitrage Opportunity? Suppose that: The spot price of gold is US$390 The quoted 1-year forward price of gold is US$390 The 1-year US$ interest rate is 5% per annum No income or storage costs for gold Is there an arbitrage opportunity? 8 The Forward Price of Gold...
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This note was uploaded on 04/26/2011 for the course BUSINESS A 00 taught by Professor Misc during the Spring '11 term at Saint Louis.

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Chapter05 - 1 Determination of Forward and Futures Prices...

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