Forward_&_Futures_Prices

Forward_&_Futures_Prices - Forward and Futures...

Info icon This preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Forward and Futures Prices A forward contract on a security is an agreement to exchange the security at a particular time in the future, known as the delivery date , at a price that is fixed at the contract initiation date . The price that is fixed at the contract initiation date is called the forward price . As an investor can take a long position or a short position in the forward contract, it thus follows from the principle of no arbitrage that we determine the forward price from the requirement that the cost to enter the forward contract is zero. For t < T , let F t , T ( S ) denote the time- t forward price for time- T delivery of a share of the stock S . ( t is the contract initiation date and T is the delivery date.) By the Fundamental Theorem of Asset Pricing , F t , T ( S ) is the quantity that satisfies the equation 0 = ( )d E [ T t r s s t e { S ( T ) F t , T ( S )}] = ( )d E [ T t r s s t e S ( T )] ( )d E [ T t r s s t e F t , T ( S )] = ( )d E [ T t r s s t e S ( T )] ( )d E [ T t r s s t e F
Image of page 1
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