Microsoft PowerPoint - PoF.ppt

Arbitrage free forward pricesƒ 142

General principle:

... no arbitrage condition

c

... cost of carry ƒ

Non-dividend paying security:

c=r

ƒ

Dividend paying security:

c=r-(1/T)ln(S

/(St0

-Z))t0

ƒ

Dividend paying security, where the di

vidend is expressed as a proportion

q

of the

spot price:

c=r-q

ƒ

Commodity (investment asset):

c=r-(1/T)ln(S

/(St0

+L))t0

ƒ

Commodity (investment asset), where th

e storage costs are expressed as a

proportion

u

of the spot price:

c=u+r

ƒ

Currency, where the income r* is the fo

reign currency risk-free interest rate:

c=r-r*

cT

t

T

t

e

S

F

0

, 0

=

Derivative securities: Forwards - Pricing