Finance School of management Chapter 14: Forward Futures prices Objective How to price forward and futures Storage of commodities st of carry Understanding financial uesTc futuris
1 Finance School of Management Chapter 14: Forward & Futures Prices Objective •How to price forward and futures •Storage of commodities •Cost of carry •Understanding financial futures
Finance School of management Chapter 14: Contents Distinction between forward The " Implied Risk-Free Rate Futures Contracts The forward Price is not a The economic Function of Forecast of the Spot Price Futures markets The role of speculators Forward-Spot Parity with Cash Payouts Relationship between Commodity Spot futures Implied" Dividends Prices The foreign exchange parity Extracting Information from Relation Commodity Futures prices The role of expectations in Spot-Futures Price Parity for Determining Exchange Rates Gold Financial futures uesTc
2 Finance School of Management Chapter 14: Contents ❖ Distinction Between Forward & Futures Contracts ❖ The Economic Function of Futures Markets ❖ The Role of Speculators ❖ Relationship Between Commodity Spot & Futures Prices ❖ Extracting Information from Commodity Futures Prices ❖ Spot-Futures Price Parity for Gold ❖ Financial Futures ❖ The “Implied” Risk-Free Rate ❖ The Forward Price is not a Forecast of the Spot Price ❖ Forward-Spot Parity with Cash Payouts ❖ “Implied” Dividends ❖ The Foreign Exchange Parity Relation ❖ The Role of Expectations in Determining Exchange Rates
Finance School of management Features of forward Contracts Two parties agree to exchange some item on a specified future date at a delivery price specified now The forward price is defined as the delivery price which makes the current market value of the contract zero No money is paid in the present by either party to the other .s The face value of the contract is the quantity of the item specified in the contract times the forward price The party who agrees to buy the specified item is said to take a long position, and the party who agrees to sell the item is said to take a short position uesTc
3 Finance School of Management ❖ Two parties agree to exchange some item on a specified future date at a delivery price specified now ❖ The forward price is defined as the delivery price which makes the current market value of the contract zero ❖ No money is paid in the present by either party to the other ❖ The face value of the contract is the quantity of the item specified in the contract times the forward price ❖ The party who agrees to buy the specified item is said to take a long position, and the party who agrees to sell the item is said to take a short position Features of Forward Contracts
Finance School of management Features of Forward Contracts Customization", difficulty of closing out positions, low liquidity The risk of contract default credit risk uesTc
4 Finance School of Management Features of Forward Contracts ❖ “Customization”, difficulty of “closing out” positions, low liquidity ❖ The risk of contract default, credit risk
Finance School of management Characteristics of Futures Futures are standard contracts immune from the credit worthiness of buyer and seller because exchange stands between traders contracts marked to market dail margin requirements(enough collateral uesTc
5 Finance School of Management Characteristics of Futures ❖ Futures are: – standard contracts – immune from the credit worthiness of buyer and seller because ▪ exchange stands between traders ▪ contracts marked to market daily ▪ margin requirements (enough collateral)