Microsoft PowerPoint - PoF.ppt

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