# 7v-4 - Forward Price Denition Forward price f(t is the...

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Lecture 7: Forward Prices, Probabilities and Risk Premia Valentyn Panchenko Forward Price Definition: Forward price, f ( t ) , is the agreed amount determined at the present time that have to be paid at the specified future time, t . Relation with present (spot) price: p = df ( t ) f ( t ) f ( t ) = p / df ( t ) = p ( 1 + i ( t )) t Example: Two years-two states: good and bad. Contract: Party A might agree to deliver 1 dollar next year if the state is good; Party B agrees to deliver 0.30 dollars next year no matter what the state has been. In this case we would say that the forward price of a good state dollar is 0.30 dollars delivered next year: party B bought one good state dollar for 0.30 dollars to be delivered (with certainty) in one year. Relation between forward and present (spot) price: Example cont.: Two years-two states: good and bad. Contact: Party A might agree to deliver 1 dollar next year if the state is good; Party B agrees to deliver 0.30 dollars next year no matter what the state has been.

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