FNCE30007 Chapter Notes - Chapter 5: Dividend Yield, Convenience Yield, Forward Price
29 Jun 2020
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Chapter 5 - determination of forward and futures prices. Investment asset is one held for investment purposes (but may not be exclusively) by significant numbers of investors. Consumption asset is one held primarily for consumption. Arbitrage determines the forward and futures prices of investment assets. Short selling is a trade that involves selling an asset that is not owned. Additional margin may be required if there are adverse movements. Can borrow money at the same risk-free rate of interest at they can lend. Take advantage of arbitrage opportunities as they occur. T = time until delivery date (in years) S0 = price of the underlying asset today. F0 = forward or futures price today r = zero-coupon risk-free rate of interest per annum, expressed with continuous compounding, for an investment maturing at the delivery date. If f0 > s0ert, arbitrageurs can borrow money, buy the asset and short forward contracts.
