Lecture21

Lecture21 - Lecture 21 : Futures Markets Economics 252,...

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Unformatted text preview: Lecture 21 : Futures Markets Economics 252, Spring 2008 Prof. Robert Shiller, Yale University FX Forwards and Forward Interest Parity FX Forward is like a pair of zero coupon bonds. Therefore, forward rate reflects interest rates in the two currencies Forward Interest Parity: Forward Rate Agreements Promises interest rate on future loan. L =actual interest rate on contract date R =contract rate D =days in contract period A =contract amount B =360 or 365 days Real CBOT Corn Price $/Bushel in 2008 Dollars, 1929-2008 CBOT Wheat Futures Delivery: No 2 Soft red winter, No 2 Hard Red winter, no dark northern spring, no 2 northern spring at par No 1 soft red winter, no 1 hard red winter, no 1 dark northern spring and no 1 northern spring at 3 cents /bushel over contract price Jul, sp, Dec Mar May, Fair Value in Futures Contract r = interest rate s = storage cost r + s =cost of carry Futures price is normally above cash price (contango) (otherwise, backwardation) (See http://www.indexarb.com) Arbitrage Enforcing Fair Value...
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Lecture21 - Lecture 21 : Futures Markets Economics 252,...

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