Lecture+20+Nov+23+2011

Lecture+20+Nov+23+2011 - FINA3104:...

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FINA 3104: Investment Analysis and Portfolio Management Lecture 20 – Futures Markets (continued) Darwin Choi November 23, 2011 Recap from Last Lecture Motivating Futures Contracts Hedging and speculating Forward & Futures Contracts Types of Assets Traded Payoffs on Futures Contracts Mechanics of Futures Trading Margin and mark to market 2
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Outline of Today’s Lecture Determinants of Futures Prices Spot Futures Parity Theorem 3 Hedge Pricing Example Suppose that today: You own an S&P 500 index fund worth $900. The fund pays $20 in dividends per year. You sell a one year futures contract for $925. Suppose that in one year: The fund could be worth $885, $925, or $965. What is the ROI on this riskless hedge? 4
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Hedge Example Outcomes Value of S T 885 925 965 Futures Payoff ( F 0 S T = 925 S T )4 0 0 40 Dividend ( D )2 0 2 0 2 0 Total 945 945 945 ROI = (945 ÷ 900)–1 = 5% without risk, so the hedge must earn the riskfree rate, r f . 5 Hedge Example Lessons Hedge ROI = Initial Futures Price + Income – Initial Spot Price Initial Spot Price Or arbitrage ensues. Re arranging: 0 0 0 ) ( S S D F + = f r D r S F f + = ) 1 ( 0 0 6
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Outline of Today’s Lecture Determinants of Futures Prices Spot Futures Parity Theorem 7 Two ways to lock in the future cost of an asset: 1. Buy it now (@ S 0 ) and hold it until time T.
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This note was uploaded on 11/27/2011 for the course FINA 3104 taught by Professor Darwin during the Fall '11 term at HKUST.

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Lecture+20+Nov+23+2011 - FINA3104:...

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