Forward/Futures Pricing Financial Derivatives 2
Author : alida-meadow | Published Date : 2025-05-17
Description: ForwardFutures Pricing Financial Derivatives 2 Forward pricing Some prelims Forward contracts on assets that Pay no income Pay a lumpy income Pays continuously Financial Derivatives 3 Forward pricing Some prelims Pay no income Easiest
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Transcript:Forward/Futures Pricing Financial Derivatives 2:
Forward/Futures Pricing Financial Derivatives 2 Forward pricing: Some prelims Forward contracts on assets that Pay no income Pay a lumpy income Pays continuously Financial Derivatives 3 Forward pricing: Some prelims Pay no income Easiest type of contract to value: Underlying asset has no intermediate cash flows. Financial Derivatives 4 Forward pricing: Some prelims Two ways to own an art piece at time T: Buy it today Go long a forward contract that expires at T Both ways should cost the same today. Assuming no benefits Financial Derivatives 5 Forward pricing 1. You want to present your spouse a painting on his/her birthday 1 yr from now. Suppose an art dealer offers to sell you a painting today for INR 100,000 or INR 120,000 in one year’s time. Would you buy it today or in one year?? (assume your banker will pays/finance it at 10%) 2. Suppose an art dealer offers to sell you a painting today for INR 100,000 or INR 108,000 in one year’s time. Would you buy it today or in one year?? (assume your banker will pays/finance it at 10%) Financial Derivatives 6 Forward pricing 3. Now suppose you have an opportunity to buy a property worth INR 1Mn now or at INR 1.1 Mn after one year. The property can be leased at INR 220,000 pa (payable at the end of the year). Our banker will finance at 15%. Financial Derivatives 7 Some relationships F = forward price S = spot price r = int. rate to fwd date t = no. of days to fwd expiry So an asset that pays no income Financial Derivatives 8 F = forward price S = spot price r = int. rate expressed as % pa t = no. of days to fwd expiry q = asset income expressed as % pa an asset that pays constant income Some relationships Financial Derivatives 9 an asset that pays lumpy income F = forward price S = spot price r = int. rate expressed as % pa t = no. of days to fwd expiry Financial Derivatives 10 Our learning Replication Fair price Interest effect Income effect The relationship between Forwards and spot Fwd. Price = spot price + cost of carry Any violations??? interest paid – income recd. Financial Derivatives 11 Violations Price a 4-month forward contract on a non-dividend paying stock with following data: Stock price = Rs. 130
