Microsoft PowerPoint - PoF.ppt

Arbitrage free forward priceƒ 141

Underlying = commodity that is an consumption asset, e.g. oil

ƒ

... no arbitrage condition

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... present value of the storage costs incurred during

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... Individuals who keep consumption assets will probably

do so because of its consumption value - not because of its value as an investment! Therefore, we are unable to exploit the arbitrage opportunity given which would require that we sell the underlying!

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Derivative securities: Forwards - Pricing