FINA 4110 Slides 5 [Determination of Forward and Futures Prices]

FINA 4110 Slides 5 [Determination of Forward and Futures Prices]

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Determination of Forward and Futures Prices Chapter 5 1
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Consumption vs Investment Assets z Investment assets are assets held by significant numbers of people purely for investment purposes (Examples: gold, silver) z Consumption assets are assets held primarily for consumption (Examples: copper, oil) 2
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Short Selling (Page 104-105) z Short selling involves selling securities you do not own z Your broker borrows the securities from another client and sells them in the market in the usual way 3
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Short Selling (continued) z At some stage you must buy the securities back so they can be replaced in the account of the client z You must pay dividends and other benefits the owner of the securities receives 4
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Notation S 0 : Spot price today F 0 : Futures or forward price today T : Time until delivery date r : Risk-free interest rate for maturity T 5
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1. Gold: An Arbitrage Opportunity? z Suppose that: z The spot price of gold is US$1000 z The quoted 1-year futures price of gold is US$1100 z The 1-year US$ interest rate is 5% per annum z No income or storage costs for gold z Is there an arbitrage opportunity? 6
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2. Gold: Another Arbitrage Opportunity? z Suppose that: z The spot price of gold is US$1000 z The quoted 1-year futures price of gold is US$990 z The 1-year US$ interest rate is 5% per annum z No income or storage costs for gold z Is there an arbitrage opportunity?
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This note was uploaded on 03/03/2012 for the course FINA 4110 taught by Professor Liu during the Spring '11 term at CUHK.

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FINA 4110 Slides 5 [Determination of Forward and Futures Prices]

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