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Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John1 C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John2C. Hull 2013
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John3C. Hull 2013
Example
You
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John6C. Hull 2013
An Arbitrage Opportunity?
Suppose
that:
Is
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John7C. Hull 2013
that:
Is
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John8C. Hull 2013
F0 = S0erT
This equation relates the forward price
and the spot price for any investment
asset that provides no income and has
no storage costs
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John10
C. Hull 2013
F0 = (S0 I )erT
where I is the present value of the
income during life of forward contract
F0 = S0 e(rq )T
where q is the average yield during the
life of the contract (expressed with
continuous compounding)
By
When the maturity and asset price are the same, forward
and futures prices are usually assumed to be equal.
(Eurodollar futures are an exception)
When interest rates are uncertain they are, in theory,
slightly different:
F0 = S0 e(rq )T
where q is the dividend yield on the
portfolio represented by the index
during life of contract
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John17
C. Hull 2013
Index Arbitrage
When
Index Arbitrage
(continued)
F0 S0e
( r rf ) T
r T
1000 e f units of
foreign currency
at time T
r T
1000 F0 e f
dollars at time T
1000S0 dollars
at time zero
1000S0erT
dollars at time T
F0 S0 e(r+u )T
where u is the storage cost per unit
time as a percent of the asset value.
Alternatively,
F0 (S0+U )erT
where U is the present value of the
storage costs.
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John23
C. Hull 2013
F0 e
rT kT
E ( ST )
or
F0 E ( ST )e ( r k )T
Fundamentals of Futures and Options Markets, 8th Ed, Ch 5, Copyright John25
C. Hull 2013
No Systematic Risk
k=r
F0 = E(ST)
k>r
F0 < E(ST)
Negative Systematic
Risk
k<r
F0 > E(ST)