First of all i should say thanks for uploading such wonderful presentation to under stand the easy concept of futures and forward contract ,but Sir , i request kindly you to sent this presentation to my mail id ramttr777@yahoo.co.in, which will very useful one to me, for preparation of my professional exams.

The Pricing of Forward Contrasts and Futures Wei Zhen
Department of Stastistics
Stanford University
2004-10-25

Part I Introduction:

Part I Introduction The Basic ideas of Pricing financial products
Definition: No Arbitrage

The Basic idea of Pricing :

The Basic idea of Pricing No Free Pizza!
Scientifically speaking: no Arbitrage. This takes money

No Arbitrage:

No Arbitrage A trading strategy that invests 0 at initial and gains positive profit at time T with certainty.

Part II Introduction to Forward contrasts and Futures:

Part II Introduction to Forward contrasts and Futures Introduction of Derivatives
Where are Derivatives traded?
Examples of Derivatives
Introduction of Forward Contracts
Introduction of Futures Contracts

Introduction: Derivatives:

Introduction: Derivatives A derivative is an instrument whose value depends on the values of other more basic underlying variables Tips An underlying variable can be anything you can imagine, from stocks, gold, oil to the possibility that there will be snow tomorrow at Stanford, or the result of a presidential election!

Where are Derivatives traded?:

Where are Derivatives traded? Exchange
Over-the-counter (OTC)
A computer- and telephone-linked network of dealers at financial institutions, corporations, and fund managers

Examples of Derivatives:

Examples of Derivatives Forward Contracts
Futures Contracts
Swaps
Options

Introduction: Forward Contracts:

Introduction: Forward Contracts A forward contract is an agreement to buy or sell an asset at a certain time in the future for a certain price (the delivery price)
It is traded in the OTC market

Introduction: Futures Contracts:

Introduction: Futures Contracts Agreement to buy or sell an asset for a certain price at a certain time T (maturity date)
Similar to forward contract
Whereas a forward contract is traded OTC, a futures contract is traded on an exchange

Part III Terminologies:

Part III Terminologies Terminology: long-short position
Short selling
Continuous compounding

Long-short position in trading:

Long-short position in trading The party that has agreed to buy has what is termed a long position
The party that has agreed to sell has what is termed a short position

Short Selling:

Short Selling Short selling involves selling securities you do not own
Your broker borrows the securities from another client and sells them in the market in the usual way

Continuous Compounding (1):

Continuous Compounding (1) Suppose you invest A$ today with interest rate R per year. Then after n years, this value increases to:
A(1+R)n$
If the rate is compounded m times per year, then the terminal value is
A(1+R/m)nm$

Continuous Compounding (2):

Continuous Compounding (2) Let m increase to infinity, we have the continuous compounding terminal value:
AeRn
where eR is the annual compound interest rate.

Part IV No Arbitrage Pricing:

Part IV No Arbitrage Pricing Notations
An example
Pricing Formula

Notations:

Notations Suppose we want to calculate the current price of a futures contract on gold (the underlying variable)

Reminder: Maturity date:

Reminder: Maturity date Futures contract is an agreement to buy or sell an asset for a certain price at a certain time T

An example (1):

An example (1) Let:
Let’s see what will happen…

An example (2):

An example (2) Borrow $40 with interest 5% per year 6 months Short a forward contract on gold 6 months Pay Gain Net profit: $2 Arbitrager

No Arbitrage Pricing:

No Free Pizza! No Arbitrage Pricing Borrow/Sell S0 with interest r per year 6 months Short/long a forward con-tract with price F0 6 months Pay/Gain Gain/Pay No Arbitrage Net profit: $0 Arbitrager

Conclusion: Pricing Formula:

Conclusion: Pricing Formula

Part V Review:

Part V Review Introduction
Forward and Futures contrasts
Terminologies
long-short position
Short selling
Continuous compounding
No arbitrage pricing
Example and formula

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By: ramttr777 (107 month(s) ago)

First of all i should say thanks for uploading such wonderful presentation to under stand the easy concept of futures and forward contract ,but Sir , i request kindly you to sent this presentation to my mail id ramttr777@yahoo.co.in, which will very useful one to me, for preparation of my professional exams.