Forward contracts Action Cash Flow at t Cash Flow at T Buy l Unit T of asset Short 1 forward Contract Borrow s St (T-t) at rate r S r(T-t) T T 0 Charles cao
Forward Contracts Action Buy 1 Unit of Asset Short 1 Forward Contract Borrow $ at rate r Cash Flow at t Cash Flow at T − St ST F − ST St r(T t) t S e − − 0 ( ) + − − = r T−t T T t 0 S F S S e St 11 Charles Cao
Forward contracts Therefore the price of the forward contract at t is: F=Se"(-0) Charles cao
12 Charles Cao Forward Contracts Therefore, the price of the forward contract at t is: r(T t) t F S e − =
Intuition You walk in a local mercedes-Benz dealer's office You want to buy a white color CL500 model eday, thelpi月90,000 owever, only black and silver colors cavalla Charles cao 13
Intuition ◼ You walk in a local Mercedes-Benz dealer’s office ◼ You want to buy a white color CL500 model ◼ Today, the price is $90,000 ◼ However, only black and silver colors are available Charles Cao 13
Intuition The salesman agrees to get a white color Cl500 from Florida in 3edays You agree te pay when the car is ready to be delivered o.Emuch sh yd the salesman charge ou 30 day ayer? terest rate is 5% Charles cao
Intuition ◼ The salesman agrees to get a white color CL500 from Florida in 30 days ◼ You agree to pay when the car is ready to be delivered ◼ How much should the salesman charge you 30 days later? ◼ Interest rate is 5% 14 Charles Cao
Intuition 0.05 90.000×e 365 S9037G 30 S90.000 )=S99,361 365 Charles cao 5
Intuition or Charles Cao 15