Forward_&_Futures_Prices - Forward and Futures...

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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 rs s t e { S ( T ) F t , T ( S )}] = T t t e S ( T )] T t t e F t , T ( S )] = T t t e S ( T )] T t t e F t , T ( S ),
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This note was uploaded on 04/01/2012 for the course 22S 175 taught by Professor Tang,q during the Spring '08 term at University of Iowa.

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