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

Info icon This preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
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.
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 2
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern