Ch05 - Determination of Forward and Futures Prices Chapter...

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Unformatted text preview: Determination of Forward and Futures Prices Chapter 5 1 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) 2 Short Selling (Page 99-101) 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 3 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 4 Notation for Valuing Futures and Forward Contracts 5 S : Spot price today F : Futures or forward price today T : Time until delivery date r : Risk-free interest rate for maturity T 1. An Arbitrage Opportunity? Suppose that: The spot price of a non-dividend paying stock is $40 The 3-month forward price is $43 The 3-month US$ interest rate is 5% per annum Is there an arbitrage opportunity? 6 2. Another Arbitrage Opportunity? Suppose that: The spot price of nondividend-paying stock is $43 The 3-month forward price is US$39 The 1-year US$ interest rate is 5% per annum Is there an arbitrage opportunity?...
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This note was uploaded on 06/26/2011 for the course BUS 316 taught by Professor N/a during the Spring '09 term at Simon Fraser.

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Ch05 - Determination of Forward and Futures Prices Chapter...

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