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Arbitrage free forward priceƒ 140

Suppose

Ä

arbitrage strategy

ƒ

t=t0


  • Short forward:


0

-Buy security:

-S

t0


  • Pay storage costs:


-L

-Credit at r:

+S

t0

+L

-Sum:

0

ƒ

t=T


  • Fulfill forward:


+F

t0,T


  • Credit repayment:


-(S

+L)et0

rT


  • Sum = Arbitrage profit:


Ft0,T

-(S

t0

+L)e

rT

(

)

rT

t

T
t

e
L

S

F

+

>

0

, 0

Derivative securities: Forwards - Pricing

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