3.1 Forward and Futures prices Chapter 3 Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.1 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Forward and Futures Prices Chapter 3
3.2 Two Kinds of Underlying Assets Investment assets: held for investment purposes by a significant numbers of investors. EXamples: stockS, bonds, gold Three different situations 1. The asset provides no income 2. The asset provides a known dollar income 3. The asset provides a known dividend yield Consumption assets: held primarily for consumption. EXamples: commodities such as copper, oil and live hogs Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.2 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Two Kinds of Underlying Assets • Investment assets: held for investment purposes by a significant numbers of investors. Examples: stocks, bonds, gold. Three different situations: 1. The asset provides no income 2. The asset provides a known dollar income 3. The asset provides a known dividend yield • Consumption assets: held primarily for consumption. Examples: commodities such as copper, oil and live hogs
3.3 Arbitrage Arguments is workable for the determination of the forward and futures prices of investment assets from spot and other observable variables is not possible to determine the forward and futures prices of consumption The forward price and futures price are very close to each other when the maturities of the two contracts are the same Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.3 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Arbitrage Arguments • is workable for the determination of the forward and futures prices of investment assets from spot and other observable variables. • is not possible to determine the forward and futures prices of consumption. • The forward price and futures price are very close to each other when the maturities of the two contracts are the same
3.4 Compounding frequency The compounding frequency used for an interest rate is the unit of measurement The difference between quarterly and annual compounding is analogous to the difference between miles and kilometers Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.4 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Compounding Frequency • The compounding frequency used for an interest rate is the unit of measurement • The difference between quarterly and annual compounding is analogous to the difference between miles and kilometers
3.5 Continuous Compounding(Page 51) In the limit as we compound more and more frequently we obtain continuously compounded interest rates R lmm→ A(1+-) Ae $100 grows to $100eR/when invested at a continuously compounded rate R for time T' $100 received at time t discounts to $100e-R7 at time zero when the continuously compounded discount rate is r Options, Futures, and Other Derivatives, 4th edition@ 2000 by John C. Hull Tang Yincai, C 2003, Shanghai Normal University
3.5 Options, Futures, and Other Derivatives, 4th edition © 2000 by John C. Hull Tang Yincai, © 2003, Shanghai Normal University Continuous Compounding(Page 51) • In the limit as we compound more and more frequently we obtain continuously compounded interest rates • $100 grows to $100eRT when invested at a continuously compounded rate R for time T • $100 received at time T discounts to $100e-RT at time zero when the continuously compounded discount rate is R mn Rn m Ae m R lim → A(1+ ) =