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Unformatted text preview: Derivative Securities Fall 2007 Section 10 addendum Notes by Robert V. Kohn, extended and improved by Steve Allen. Courant Institute of Mathematical Sciences. Forwards versus futures. The Section 10 notes include a discussion of convexity . It explains, among other things, why the futures price of a bond is a little higher than the forward price. [The version distributed in class said lower rather than higher; that was a typo, now corrected in the version on the web.] The following discussion, taken from Section 12.3 of Quantitative Modeling of Derivative Securities by Avellaneda and Laurence, provides a more quantitative discussion of this phenomenon. Another example of convexity discussed in the Section 10 notes is an unconventional forward rate agreement whose payment is made at the beginning of the term rather than at the end. For a more quantitative discussion of that example, showing how Blacks formula can be used to value such an instrument, see Hulls Section 27.1 (Application 1). ************************ Forwards versus futures. There is a well-developed market for futures contracts on treasury bonds. At first this may seem surprising, since there are so many different types of bonds and a futures contract must refer to a well-defined underlying. In practice this difficulty is avoided by rules that permit a variety of similar bonds to be delivered when the...
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This note was uploaded on 01/02/2012 for the course FINANCE 347 taught by Professor Bayou during the Fall '11 term at NYU.
- Fall '11